Customers set to be able to borrow more as APRA moves to scrap key mortgage rule
The banking regulator has proposed scrapping a rule that has meant all new mortgage customers are assessed on their ability to manage repayments with 7.25 per cent interest rates, saying the policy may have reached its use-by date.
In a move that is likely to increase the maximum amount a new customer can borrow, at a time when mortgage growth has been sagging, the Australian Prudential Regulation Authority (APRA) has put its 7 per cent interest rate "floor" under review.
The 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.
APRA on Tuesday proposed removing the guidance that banks use an interest rate floor of 7 per cent, saying it would allow banks to set their own minimum assessment rates.
“With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7 per cent floor and actual rates paid has become quite wide in some cases – possibly unnecessarily so," chairman Wayne Byres said.
“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. Rather, it is simply recognition that the current interest rate environment does not warrant a uniform mandated interest rate floor of 7 per cent across all products," he said.
More to come