Via APRA just now:
The Australian Prudential Regulation Authority (APRA) has today increased the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications.
In a letter to authorised deposit-taking institutions (ADIs), APRA has told lenders it expects they will assess new borrowers’ ability to meet their loan repayments at an interest rate that is at least 3.0 percentage points above the loan product rate. This compares to a buffer of 2.5 percentage points that is commonly used by ADIs today.1
APRA’s decision, which reflects growing financial stability risks from ADIs’ residential mortgage lending, is supported by other members of the Council of Financial Regulators (CFR), comprising the Reserve Bank of Australia, the Treasury and the Australian Securities and Investments Commission. In determining its course of action, APRA also consulted with the Australian Competition and Consumer Commission.
APRA Chair Wayne Byres said this is a targeted and judicious action designed to reinforce the stability of the financial system.
“In taking action, APRA is focused on ensuring the financial system remains safe, and that banks are lending to borrowers who can afford the level of debt they are taking on – both today and into the future.
“While the banking system is well capitalised and lending standards overall have held up, increases in the share of heavily indebted borrowers, and leverage in the household sector more broadly, mean that medium-term risks to financial stability are building.
“More than one in five new loans approved in the June quarter were at more than six times the borrowers’ income, and at an aggregate level the expectation is that housing credit growth will run ahead of household income growth in the period ahead. With the economy expected to bounce back as lockdowns begin to be lifted around the country, the balance of risks is such that stronger serviceability standards are warranted,” Mr Byres said.
Together with other members of the CFR, APRA will continue to closely monitor risks in residential mortgage lending, and can take further steps if necessary.
The mortgage buffer should and could become the new cash rate. Another reason why the RBA and APRA should be smashed back together. Though at least they are learning to co-ordinate.
Loosening the mortgage buffer was the key policy maneuver that pulled house prices out of the Hayne RC swan dive. Though it must be said, it was then crashed from a standard 7% to 2.5% above the cash rate, an immense easing.
So, today’s tightening is meaningful for mortgage availability but there’s a long way to go before it raises any threat of falling house prices.