• 21/10/2021

APRA tightens home loan standards for new customers as risks grow

Clancy Yeates| Sydney Morning Herald| 6 October 2021

APRA forces banks to raise housing assessment rates to counter risks (smh.com.au)

The banking regulator is acting to quell the growing financial risks of surging house prices, by forcing banks to be more conservative when assessing how much new customers can borrow.

As cheap debt puts a rocket under house prices, the Australian Prudential Regulation Authority (APRA) on Wednesday said it would require banks to test whether new customers could manage their repayments at an interest rate 3 percentage points higher than the actual rate on the loan.

The change, which compares with current rules requiring customers are assessed on rates 2.5 percentage points higher than the loan’s actual interest rate, will mean many customers will have their borrowing capacity reduced.

APRA said the impact would be “fairly modest,” however, and increasing the “serviceability buffer” by 0.5 percentage points would cut a typical customer’s borrowing capacity by about 5 per cent. That would mean a customer’s borrowing capacity that was previously $500,000 would fall to $475,000.

APRA chairman Wayne Byres said the move was a response to housing debt growing faster than household income, and growing numbers of customers borrowing more than six times their income, an amount considered to be higher-risk.

“In taking action, APRA is focused on ensuring the financial system remains safe, and that banks are lending to borrowers who can afford the level of debt they are taking on – both today and into the future,” Mr Byres said.

“While the banking system is well capitalised and lending standards overall have held up, increases in the share of heavily indebted borrowers, and leverage in the household sector more broadly, mean that medium-term risks to financial stability are building.”

APRA said the change would affect all new customers, but it was likely to have a larger impact on property investors, who tended to be more leveraged.Advertisement

It said first home buyers were generally less likely to borrow a high multiple of their income because their borrowing capacity was more constrained by the size of their deposit.

ANZ Bank’s head of Australian economics, David Plank, said further action by regulators to rein in financial risks – known as “macroprudential” policies – were “more likely than not.”

“In the context of the current strength of the housing market this is a modest change,” Mr Plank said.

Evans and Partners analyst Matthew Wilson described the change as “expectedly very weak,” saying caps on lending at more than six times a borrower’s income would be more serious, but harder for banks to implement.

APRA said it was not trying to target house prices, but to ensure lending as prudent and that borrowers could manage their debts in a range of circumstances.

The changes will not apply to non-bank lenders, and APRA said it had chosen to exclude this part of the market because it did not think these lenders were “materially” contributing to the risk of financial instability.

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