Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)
Mortgage interest rates may be near their lowest in history, but people applying for a new loan will have to assure their bank they are capable of paying a much higher rate when they inevitably rise.
Against the backdrop of house prices rising at their fastest pace in more than 30 years and strong demand for mortgages, the banking watchdog has tightened requirements for getting a home loan, whether the applicant is an owner-occupier or an investor.
The Australian Prudential Regulation Authority has told the banks it wants them to assess new borrowers’ ability to meet their loan repayments at an interest rate at least three percentage points above the loan product rate.
This compares with the serviceability buffer of 2.5 percentage points that has commonly used.
Australia’s largest home lender, Commonwealth Bank of Australia, said this was a “sensible and appropriate” step to take some heat out of the housing market.
“Having increased our floor to 5.25 per cent in June, we think this further step will provide additional comfort for borrowers and is a prudent measure for lenders,” CBA chief executive Matt Comyn told AAP.
“We will implement the changes this month and expect that it may be necessary to consider additional steps as lockdowns end and consumer confidence increases.”
APRA chair Wayne Byres said the action was 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,” Mr Byres said in a statement on Wednesday.
“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.”
He said more than one in five new loans approved in the June quarter were at more than six times the borrowers’ income and 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.
The Council of Financial Regulators – which comprises APRA, the Reserve Bank of Australia, the Treasury and the Australian Securities and Investments Commission – have been monitoring developments in Australia’s heated housing market for some months.
The council flagged after a meeting last month that APRA would be taking action before long.
RBA Capital Markets chief economist Su-Lin Ong said the measure will have a greater impact on the more indebted and marginal borrower, while also aimed at investors.
“They tend to be more leveraged than owner-occupiers. In our view, this may be a forward-looking measure, with the acceleration in investor lending in recent months a warning,” Ms Ong said.
A recent survey by loan comparison website Canstar found well over half of respondents expect house prices to increase further over the next three months.
“This suggests a buoyant market that encourages borrowers and lenders to stretch the credit barriers, something APRA wants to discourage before it becomes a reality,” Canstar’s Steve Mickenbecker says.
“Large loans affordable at today’s rock-bottom rates can become stressed loans when rates are four or five per cent higher.”