Home loan borrowing capacity to be boosted as APRA scraps rule
A key constraint on borrowing limits that was put in place during the property boom has been removed by the banking regulator, in another move that may stimulate the soggy mortgage market.
The Australian Prudential Regulation Authority (APRA) on Friday confirmed it would scrap a rule that has meant all new mortgage customers are assessed on their ability to manage repayments with 7.25 per cent interest rates.
APRA said on Friday that instead of the interest rate "floor," it would require banks to test if customers could manage repayments with rates at least 2.5 percentage points higher than a loan's current rate.
The decision, which is effective immediately, is in line with APRA's proposed changes, which it floated in May.
With many mortgages currently attracting interest rates of about 3.5 per cent, the change will mean banks will need to test whether borrowers can afford their loan at a rate of 6 per cent, instead of 7.25 per cent. As a result, a customers' borrowing capacity could increase by about 10 per cent or more, analysts have estimated.
The change, which has strong support from banks, is seen by experts as one reason behind the recent signs of stabilisation in Sydney and Melbourne's property markets, alongside the election result and the back-to-back interest rate cuts.
APRA chairman Wayne Byres said the previous interest rate "floor" was higher than needed, while also saying the previous policy had been complicated by the fact banks charge so many different interest rates, according to the type of loan.
“In the prevailing environment, a serviceability floor of more than seven per cent is higher than necessary for ADIs [authorised deposit-taking institutions] to maintain sound lending standards," Mr Byres said.
"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,” Mr Byres said.
Mr Byres said the changes were not intended to signal the regulator would be putting less emphasis on sound lending standards by banks.
More to come