The Australian Prudential Regulation Authority (APRA) has proposed easing mortgage-lending criteria.
APRA has proposed removing its guidance that authorised deposit-taking institutions (ADIs) should assess whether borrowers can afford their repayment obligations using a minimum interest rate of at least 7%. Instead, ADIs would be permitted to review and set their own minimum interest-rate floor for use in serviceability assessments.
APRA is also planning for ADIs’ serviceability assessments to incorporate an interest rate buffer of 2.5%. Currently, APRA expects ADIs to assess loan serviceability using the higher of either an interest rate floor of at least 7% or a 2% buffer over the loan’s interest rate. APRA’s guidance also indicates that a prudent ADI should use rates comfortably above these minimums. Most ADIs use 7.25% and 2.25%, respectively.
"The proposed changes will provide ADIs with greater flexibility to set their own serviceability floors, while still maintaining a measure of prudence through the application of an appropriate buffer to reflect the inherent uncertainty in credit assessments," said APRA Chair Wayne Byres.
APRA first introduced the serviceability guidance in December 2014 in line with its commitment to reinforce sound residential lending standards. In particular, the interest-rate floor and buffer served an important purpose in limiting excessive borrowing in an environment of low interest rates and high household debt. The guidance was subsequently incorporated into Prudential Practice Guide APG 223 for residential mortgage lending, which APRA is now looking to modify.
"The lending environment has changed quite a lot since that time. We have seen the reintroduction of differential mortgage pricing for owner-occupiers, investor and interest-only borrowers," said CoreLogic Research Analyst Cameron Kusher. "Lenders have become much more focused on responsible lending requirements, and as a result they are asking borrowers more detailed questions about their financial positions and moved away from using the HEM Index."
The differential pricing in mortgages and the declines in interest rates since the end of 2014 are the major factors that have made the greater than 7% buffer inappropriate for the current lending environment, according to Kusher.
The market expectation is that interest rates will track downwards. However, under the current policy, lower interest rates (and mortgage rates) would not necessarily enable new borrowers to secure a mortgage. The reason? Those that could not qualify for a mortgage previously would still be unable to qualify despite the lower rates.
"Under these proposed changes, if we look at the same scenario as previous, whereby someone is looking to borrow at an interest rate 3.9%. This borrower would previously been assessed on their ability to repay the mortgage at an interest rate of 7.25%; now they would be assessed on their ability to repay at a lower 6.4%," said Kusher. "The proposed APRA changes seem sensible given the interest rate environment with the expectation that rates will fall from here and remain lower for longer. Furthermore, since 2014 it has become much more difficult to get a mortgage, which is partly because of this serviceability assessment."
A recent investor update from ANZ showed that lower borrowing capacity was driven by three factors: HEM changes (60%), servicing rate floor at 7.25% (30%) and income haircuts (10%).
"While these changes are welcome and will help some borrowers that can’t quite access
a mortgage currently to get one, it is unlikely to result in a rebound in the housing market," Kusher said. "...It will remain much tougher than in the past to get a mortgage because of other areas of tightening. Furthermore, the buffer of 2.5% above the mortgage rate is higher than the 2% buffer that was used prior to December 2014."
In general, the planned changes will mean more people are able to get a mortgage. Furthermore, these alterations might also ease some of the urgency for official interest-rate cuts by the Reserve Bank, according to Kusher. If housing can provide some additional economic stimulus, rate slashes might be less necessary.
"Should these changes be implemented, it would potentially slow the declines further and may result in an earlier bottoming of the housing market (we currently expect the market to bottom in mid-2020). Despite that prospect, it will remain more difficult to obtain a mortgage than it has done in the past and we would expect that if/when the market bottoms a rapid re-inflation of dwelling values is unlikely," he said.
Property Council of Australia, on the other hand, acknowledged only the positive impacts of APRA's plan.
“It makes sense to revisit some of the measures originally put in place at the peak of the housing market. Different markets need different settings," said Ken Morrison, chief executive of the Property Council of Australia. “A stable and well-regulated financial system is fundamental to our economic prosperity and it is appropriate that the guidelines for lending standards are regularly reviewed.”
Morrison said that the proposal is not about easing sound lending standards. Instead, it is a proof of recognition that the interest-rate environment has changed, with interest rates now at a record lows. Hence, the gap between the 7% floor and actual rates has become quite wide.
