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APRA tightens lending criteria, but not how experts predicted

Published 06/10/2021, 12:56 pm
Updated 09/07/2023, 08:32 pm

On Wednesday the prudential regulator increased the minimum interest rate buffer it expects banks to use when assessing home loan serviceability.

The serviceability buffer has gone from 2.5% to 3.0% above the loan's advertised rate.

So, on a 1.99% home loan, a borrower would be assessed on their ability to repay the mortgage at an interest rate of 4.99%.

This change is expected to reduce the borrowing power of property buyers by around 5%.

A few months ago, CBA increased its own serviceability buffer from 5.1% to 5.25%, but no one else followed.

Only two years ago, APRA's loan serviceability 'floor' was as high as 7.25%.

It was widely tipped APRA would tighten debt-to-income (DTI) ratio criteria, which experts argued would be unfair and inefficient.

In its rationale for the move, APRA said adjusting serviceability is relatively easy to implement, while DTI limits would be more "operationally complex to deploy consistently", potentially leading to 'credit rationing' by the banks.

APRA chair Wayne Byres said Wednesday's announcement is a targeted action designed to reinforce financial stability.

"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," Mr Byres said.

"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."

In the June quarter, more than one fifth of all new home loans were to applicants borrowing more than six times their income.

There was little mention of prudential standards or tightening lending criteria in Tuesday's Reserve Bank monetary policy announcement, though Governor Dr Philip Lowe provided some foreshadowing.

"In this environment, it is important that lending standards are maintained and that loan serviceability buffers are appropriate," Dr Lowe said.

How the experts reacted

Adjusting serviceability buffers has some rationale compared to DTI ratios, according to Peter Tulip, chief economist at the Centre for Independent Studies.

"Ideally, we should remove the whole paternalistic apparatus and let lenders and borrowers find mutually agreeable terms," Mr Tulip said on Twitter (NYSE:TWTR).

"If APRA knows something about the relevant risks that the parties do not, it should tell them.

"But at least serviceability buffers have a paternalistic rationale. The debt-to-income ratio that APRA is considering does not even have that."

ANZ's head of Australian economics David Plank said more tightening could come.

Less than 24 hours after the RBA's post meeting statement flagged the importance of loan serviceability buffers, the Australian Prudential (LON:PRU) Regulatory Authorityhas announced an increase in [serviceability buffers]," Mr Plank said.

"In the context of the current strength of the housing market this is a modest change.

"As such, further macroprudential tightening seems more likely than not ... APRA's upcoming information paper on the framework it applies to macroprudential policy will be important in this context."

"APRA tightens lending criteria, but not how experts predicted" was originally published on Savings.com.au and was republished with permission.

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