The ANZ Bank has advised that its ‘floor rate’ for home loan customers will be reduced from 7.25% to 5.5% in response to the Australian Prudential Regulation Authority’s (APRA) recent reforms. ANZ will also increase its sensitivity margin to 2.5%. Rival banks are expected to quickly follow ANZ in reducing their floor rates, which are used to assess a borrower’s ability to repay a loan. From The Australian:
“In response to recent APRA announcements … ANZ will now set its own minimum floor rate of 5.5 per cent and has adjusted the standard buffer to at least 2.5 per cent plus a loan’s interest rate,” ANZ told its broker network…
The move is expected to see other banks quickly follow with their own minimum floor to assessing a borrower’s ability to repay a loan. The change is expected to help boost the nation’s property market… by increasing a customer’s or household’s borrowing capacity by up to 14 per cent…
While the changes to APRA’s interest rate buffer are unambiguously bullish for both mortgages and house prices, they are likely to be somewhat offset by tightening of the Household Expenditure Measure (HEM) – a relative poverty measure – in the wake of the banking royal commission.
According to Endeavour Equities, using the HEM to measure borrower expenses “upwardly biased Debt Service to Income ratios by 10-15%”, and “the size of the credit crunch is directly proportional to the unreasonableness of the HEM expenses benchmark”.
A modified HEM will soon come into effect that will more accurately match expenditure benchmarks with income. According to UBS, this will constrain credit availability going forward and could offset much of the stimulus coming down the pipe:
Looking further ahead, the outcome of the Westpac versus ASIC case is going to have a direct bearing on the legality of the benchmarks. So too will the outcome of private class actions, such as Maurice Blackburn alleging that Westpac was overly-reliant on the HEM benchmark when assessing mortgage loan applicants.
If Westpac loses these cases, then ADIs may be forced to abandon the HEM altogether and rigorously scrutinise a borrowers’ capacity, with the end result being even tighter credit availability.
While the outcome of these cases is up in the air, it is unlikely there will be a new credit explosion. Rather, we are likely to see a gentler expansion of mortgage lending and moderate house price growth.