Source: AFR
The Australian Prudential Regulation Authority has removed the serviceability buffer that required banks to assess all borrowers against their capacity to repay the loan at 7 per cent.
The change - effective immediately - was flagged by The Australian Financial Review on Thursday.
Under the new rules, banks will merely add 250 basis points to the rate paid in order to assess whether or not the loan is suitable for the borrower.
APRA chairman Wayne Byres said it had become clear that the floor of 7 per cent was too high in the current low interest rate environment but stressed banks should remain vigilant.
“A serviceability floor of more than seven per cent is higher than necessary for ADIs to maintain sound lending standards" Mr Byres said in a statement.
“The changes being finalised today are not intended to signal any lessening in the importance APRA places on the maintenance of sound lending standards."
Mr Byres also said following the introduction of differential pricing, the logic behind a universal floor was no longer sound, implying that some borrowers were being more heavily penalised than others.
Until today APRA asked the banks to assess all borrowers against their ability to repay a loan at a flat 7 per cent or an additional 200 basis points. Banks typically add another 25 basis points on top of the APRA hurdles.
As interest rates have moved lower and lower, mainstream lenders such as BOQ have begun to offer loans at rates as low as 2.99 per cent but borrowers were still being assessed against their ability to repay at 7 per cent or more than twice the available interest rate.
ANZ CEO Shayne Elliott was among the first to call for the regulator to revisit the buffers at the bank's first half results in May when he said the time was right to rethink it. Mr Elliott said a number of borrowers were unable to clear the hurdle.
More recently assistant treasurer Michael Sukkar MP told the Financial Review on Thursday he wanted to bring together the regulators and the banks to "get credit flowing" and remove "choke points" in the system.
Managing director of Wollongong mortgage broking franchise Mortgage Success Katrina Rowlands said at the new rate of 250 basis points above the actual rate paid, cuts from the Reserve Bank will finally have an impact.
"People can actually afford to borrow the money they need to buy a house. This is common sense and will now allow the housing market to progress again" Ms Rowlands said.
APRA's Mr Byres said many of the risks that haunted the Australian financial landscape persisted such as high household debt and lacklustre wage growth.
He said it was important for banks to consider their exposures and risk appetite before throwing off the serviceability shackles.
Two weeks ago the Financial Review revealed the regulator had forced Westpac into an embarrassing backdown after the bank admitted that it had jumped the gun and removed the lending handbrake.
APRA was furious the bank had moved before official guidance was released and made its displeasure known. Westpac subsequently reinstated the benchmark soon after.
At 11.30am bank shares were ticking higher on a positive day for shares. ANZ was up 0.1 per cent, CBA was up 0.65 per cent, NAB was up 0.2 per cent and Westpac was up 0.35 per cent.