APRA considers new serviceability assessment

by Madison Utley21 May 2019

APRA has proposed allowing lenders to review and set their own minimum interest rate floor for use in serviceability assessments, in a letter to authorised deposit-taking institutions (ADIs) posted earlier today.

Currently, APRA has ADIs determining whether a borrower can afford their repayment obligations via an assessment that utilises the higher of either a 2% buffer above the loan product rate or a minimum interest rate floor of at least 7%.

The regulator unrolled the guidelines in December 2014 to help promote sound residential lending standards and limit excessive borrowing in an environment of low interest rates and high household debt.

“APRA introduced this guidance…at a time of heightened risk. Although many of those risk factors remain – high house prices, low interest rates, high household debt, and subdued income growth – two more recent developments have led us to review the appropriateness of the interest rate floor,” explained APRA chair Wayne Byres.

“With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7% floor and actual rates paid has become quite wide in some cases – possibly unnecessarily so.”

“In addition, the introduction of differential pricing in recent years – with a substantial gap emerging between interest rates for owner-occupiers with principal-and-interest loans on the one hand, and investors with interest-only loans on the other – has meant that the merits of a single floor rate across all products have been substantially reduced,” he added.

As such, APRA is now open to amending its guidance on mortgage lending and has begun consultation to gain insight for possible revisions.

According to Byres, "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.”

“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% across all products,” said Byres.

The month-long consultation closes on 18 June, with APRA to release a final version of the updated guidelines shortly afterwards.