APRA toughens mortgage rules and raises benchmark interest rate

The banking regulator has announced stricter viability tests for home loans, which will make it more difficult for some borrowers to obtain a mortgage.

In a letter to banks today, the Australian Prudential Regulation Authority (APRA) increased the minimum interest rate cushion on home loan applications by 2.5 to 3 percentage points.

“All ADI [authorised deposit taking institutions] should operate with a margin of at least 3 percentage points on the interest rate of loans, “warned the regulator.

“The buffer provides an important contingency for increases in interest rates over the life of the loan, as well as for any unforeseen changes in a borrower’s income or expenses.

“When ADIs continue to approve loans using a lower buffer rate beyond the end of October 2021, APRA will adjust individual prudential capital requirements to reflect the higher credit risk inherent in new loans. “

This means that from the end of October, banks will have to test whether new borrowers can still pay their mortgage payments if mortgage interest rates rise 3 percentage points above their current rate.

If they do not use this higher test, they will be financially penalized by having to hold more reserves against losses, which would reduce their profitability.

In practice, this means that all regulated institutions will use the minimum 3 percentage point buffer.

For home loan seekers, this means that the maximum amount people can borrow relative to their income and expenses will be lower than it was under the old 2.5% utility test.

APRA President Wayne Byres said the move was aimed at avoiding the risks of building a growing number of very large mortgages.

“While the banking system is well capitalized and lending standards have generally been maintained, the increase in the share of heavily indebted borrowers and indebtedness in the household sector in general means that medium-term risks for the financial stability is accumulating, ”he noted.

“More than one in five new loans approved in the June quarter represented more than six times borrower income, and at the aggregate level, growth in home credit is expected to outpace growth in the home loan. household income over the coming period. “

Many analysts expected tighter mortgage requirements after recent comments from regulators and the treasurer, but most did not expect the change to happen so quickly.

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