Customers taking out a new home loan may be able to borrow tens of thousands of dollars more, under the recent change from the banking regulator. Australian Prudential Regulation Authority (APRA), has confirmed its plans to remove its current 7 per cent interest floor for mortgage serviceability assessments.
For a couple with two children and a household income of $150,000 per year, the change could increase their maximum borrowing capacity by $67,000, according to RateCity analysis. That is based on a lender using an assessment rate of 6.5 per cent, instead of 7.25 per cent currently in place.
The interest rate “floor” was introduced in late 2014 in an attempt to contain soaring house prices and surging housing investor loan growth. It has required banks to test prospective borrowers against the higher of either an interest rate of 7 per cent or a 2 per cent “buffer” over the loan’s actual interest rate.
In practice, this has meant most banks test whether customers can manage repayments if interest rates hit 7.25 per cent – which is much higher than the actual rates of less than 4 per cent being offered on many mortgages today.
Replacing the current 7 per cent assessment, Authorised Deposit-Taking Institutions (ADIs) will be permitted to review and set their own minimum interest rate floor to be used in their serviceability assessment. A revised interest rate buffer of at least 2.5 per cent over the loan’s interest rate is to be utilised.
APRA chair Wayne Byres said APRA believes “In the prevailing environment, a serviceability floor of more than seven per cent is higher than necessary for ADIs to maintain sound lending standards. Additionally, the widespread use of differential pricing for different types of loans has challenged the merit of a uniform interest rate floor across all mortgage products,”.
“However, with many risk factors remaining in place, such as high household debt, and subdued income growth, it is important that ADIs actively consider their portfolio mix and risk appetite in setting their own serviceability floors. Furthermore, they should regularly review these to ensure their approach to loan serviceability remains appropriate.”
“The changes, while likely to increase the maximum borrowing capacity for a given borrower, are not intended to signify any lessening in the importance that APRA places on the maintenance of sound lending standards,” he said.
“This updated guidance provides ADIs with greater flexibility to set their own serviceability floors while maintaining a measure of prudence through the application of an appropriate buffer that reflects the inherent uncertainty in credit assessments.”