APRA introduces tougher home loan requirements

Young couple looking at real estate.

Amid rising concerns around risks in the housing market, the Australian Prudential Regulation Authority (APRA) has announced it will be tightening serviceability requirements, effectively making it more difficult for some borrowers to get a home loan.

In a letter to authorised deposit-taking institutions (ADIs), the regulator said banks must raise their minimum interest rate buffers to at least 3.0 percentage points above their loan product rates.

According to APRA, the buffer “provides an important contingency for rises in interest rates over the life of the loan, as well as for any unforeseen changes in a borrower’s income or expenses.”

Previously, banks were required to add a margin of at least 2.5 per cent, or use an appropriate floor rate of their own.

APRA Chair Wayne Byres said the decision, which is supported by other members of the Council of Financial Regulators (CFR), was made with the interest of borrowers and the economy more broadly in mind.

“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,” he said.

“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.”

RELATED: Property prices rising at fastest pace since June 1989, says CoreLogic

The decision comes a day after the Reserve Bank of Australia’s October policy meeting, where RBA governor Philip Lowe reiterated the need for banks to review their lending practices and ensure risk is being appropriately managed. 

“In this environment, it is important that lending standards are maintained and that loan serviceability buffers are appropriate,” he said.

Recent data from CoreLogic showed property values across the country have risen by a much faster clip than wages - 20.3 per cent in the last 12 months - raising concerns that borrowers were overextending themselves in a bid to secure a home.  

“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,” Byres said.

“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.”

For more information about mortgage and lending trends, head over to our home loan statistics page, and for an idea of where interest rates currently sit, visit our home loan comparison page.

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