APRA’s newly announced proposal to allow banks to set their own serviceability floors when assessing residential mortgage loan applications could enable more people to access mortgages, industry commentators have suggested.
The prudential regulator launched a four-week consultation on Tuesday (21 May) asking members of industry to respond to its proposals to revise its guidance on the serviceability assessments that banks perform on residential mortgage loan applications.
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
The average interest rate floor is approximately 7.25 per cent for most banks.
However, in a letter to authorised deposit-taking institutions (ADIs) issued this week, APRA has proposed revising its guidance to remove the 7 per cent requirement and instead allow ADIs to determine their floor rate levels. It is also looking to increase the interest rate buffer guide from 2 per cent to 2.5 per cent “to maintain prudence in overall serviceability assessments”.
APRA said, however, it would still expect ADIs to determine and keep under regular review “a prudent level based on their own portfolio mix, risk appetite and other circumstances”.
According to APRA chair Wayne Byres, the guidance was first brought in when interest rates were higher – and, given that interest rates are now at “record lows” (and expected to remain low for “some time”), the gap between the 7 per cent floor and actual rates paid has become wider.
He added that the advent of differential pricing has meant that the merits of a single floor rate across all products have been substantially reduced.
“The proposed changes therefore aim to 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.”
‘A positive boost for first home buyers’
Speaking of the proposed changes, several industry commentators have said that the move to change serviceability floors and buffers could enable more home owners to access mortgages.
James Symond, the CEO of Aussie, commented: “It is sensible that APRA is reviewing its guidelines around the interest rate floor because today’s lending market is very different to 2014. With rates today as low as mid 3 per cent, the minimum interest rate floor of 7 per cent is making the hurdle to securing a home loan unnecessarily high. That’s well over 3 per cent above the more competitive interest rates in the market today.
“I expect this change would provide a positive boost for first home buyers in particular, who have been battling against high property prices, a tightened credit environment and what has become an unreasonably high constraint on serviceability assessments.
“While it’s still important that consumers can comfortably afford their home loan repayments in the event of rising interest rates, a mortgage broker can provide this guidance for borrowers when assessing their borrowing capacity,” Mr Symond noted.
Building on this, the research director at RateCity.com.au, Sally Tindall, said that the change could “significantly boost” the borrowing power of first home buyers.
She estimated that a family on an average household income of $109,688 would be able to borrow up to $60,000 more if their loan was assessed at 6.25 per cent instead of 7.25 per cent.
The average single person would be able to borrow up to around $50,000 more under the same scenario, she suggested.
Ms Tindall added that the change could be more effective than an RBA rate cut for new borrowers: “This is going to be a game changer for a lot of potential buyers who can’t quite get their home loan application across the line.”
“We’re living in a very different home lending landscape than when the 7 per cent buffer came into effect.
“While the RBA today in their minutes hinted at an impending rate cut, this potential change could buy them some more time, despite the fact that it won’t affect families with existing mortgages.
“After a record-breaking 33 months of living with a cash rate at a historic low, the new norm for interest rates has changed dramatically,” the research director commented.
“On top of this, we’ve just lived through two years of intense scrutiny from the regulator and the [banking] royal commission, so the hoops people have to jump through to get the green light on a loan are onerous – perhaps overly so.
“This proposed move strikes a sensible balance where prudent lending still remains front of mind for both borrowers and lenders,” Ms Tindall concluded.
Meanwhile, Athena Home Loans co-founder and CEO Nathan Walsh said: “This is a huge win for borrowers. APRA’s rule change will unlock the mortgage handcuffs that prevent many borrowers from switching to a better value home loan. The savings potential from switching from typical big bank rates can be tens of thousands of dollars over the life of the loan. We encourage Aussies to do a quick home loan health check and review their current interest rates to see the savings potential.”
Lowering buffers could ‘reduce assessed repayments by $60 a week’
Likewise, the CEO of the Customer Owned Banking Association (COBA), Michael Lawrence, said the proposal was “welcome news for many Australians who can afford to get a home loan but who find themselves struggling to fit into the current serviceability buffers”.
“Lowering the interest rate floor by even 1 per cent could take off approximately $60 per week of the assessed repayment on a $400,000, 30-year loan,” Mr Lawrence said.
“The proposal could also help improve competition in the market by reducing the advantage enjoyed by non-ADI lenders who don’t have to comply with APRA regulations.
“More appropriate serviceability buffers mean more Australians will be able to borrow from customer-owned ADIs and won’t be forced to turn to riskier non-ADI lenders,” he said.
“Australians should use this as an opportunity to shop around beyond the big four and investigate customer-owned banks who already have competitive interest rates.”
Likewise, CoreLogic’s research analyst, Cameron Kusher, said that the proposed APRA changes “seem sensible” given the interest rate environment and particularly given the expectation that rates will fall from here and remain lower for longer.
“Furthermore, since 2014 it has become much more difficult to get a mortgage, which is partly because of this serviceability assessment,” he said.
Mr Kusher continued: “[W]hile these changes are welcome and will help some borrowers that can’t quite access a mortgage currently to get one, it is unlikely to result in a rebound in the housing market… it will remain much tougher than in the past to get a mortgage because of other areas of tightening.”
However, the CoreLogic analyst said that “overall, for the housing market, it will mean more people are able to get a mortgage”.
“These proposed changes, in conjunction with the uncertainty of the election now behind, will potentially provide additional positives for the housing market,” Mr Kusher said.
“Furthermore, these changes may also ease some of the urgency for official interest rate cuts by the Reserve Bank. If housing can provide some additional economic stimulus, rate cuts may be less necessary,” Mr Kusher said.
He concluded: “Should these changes be implemented, it would potentially slow the declines further and may result in an earlier bottoming of the housing market. We currently expect the market to bottom in mid-2020.
“Despite that prospect, it will remain more difficult to obtain a mortgage than it has done in the past and we would expect that if/when the market bottoms, a rapid re-inflation of dwelling values is unlikely.”