APRA looks to amend mortgage lending guidance

APRA looks to amend mortgage lending guidance

The prudential regulator is looking at revising its guidance on the serviceability assessments that banks perform on residential mortgage loan applications, giving them greater flexibility to set their own serviceability floors.

Currently, in a bid to limit excessive borrowing in an environment of low interest rates and high household debt, APRA expects ADIs to assess loan serviceability using the higher of either:

an interest rate floor of at least 7 per cent
a 2 per cent buffer over the loan’s interest rate
However, in a letter to authorised deposit-taking institutions (ADIs) issued today, APRA has proposed removing its guidance that ADIs should assess whether borrowers can afford their repayment obligations using a minimum interest rate of at least 7 per cent.

Instead, ADIs would be permitted to review and set their own minimum interest rate floor for use in serviceability assessments.

“APRA will still expect ADIs to determine and keep under regular review their own level of floor rate, but ADIs will be able to choose a prudent level based on their own portfolio mix, risk appetite and other circumstances,” the letter read.

The regulator has also proposed that ADIs’ serviceability assessments incorporate an interest rate buffer of 2.5 per cent (up from its current level of 2 per cent) “to maintain prudence in overall serviceability assessments”.

APRA is also removing the expectation that a “prudent ADI” would use a buffer “comfortably above the proposed 2.5 per cent to “improve clarity of the prudential guidance”.

This change in guidance – once adopted by the bank – will mean that you are able to borrow more than what you currently are able to. Watch this space to find out when things are changing and how it affects you.