Mortgage Lending Restrictions Relaxed by APRA

Will the home loan rule relaxation from APRA allow for bigger mortgages?

Yes, people may be eligible for larger home loans as APRA allows lenders to change the way they assess a prospective home buyer’s ability to meet repayments.

The Australian Prudential Regulation Authority (APRA) has decided to relax stringent lending restrictions on banks and other financial institutions.

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What does that mean for you? 

Banks no longer need to check to see whether their residential customers can afford, at least, a 7 percent interest rate on their home loan repayments. 

Under the new standard, implemented by APRA on Friday, 6 July 2019, the banks will have the freedom to set their own serviceability buffers. 

However, the regulator said on Friday that banks can set their own minimum interest rate floor and do their calculations, using a 2.5% buffer.

Therefore, as many banks now offering variable mortgage rates in the

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low-3%s, many borrowers are likely to be tested at a rate below 6% per annum when banks decide whether they can afford to repay their loan.

APRA’s chairman, Mr. Wayne Byers said: “In the prevailing environment, a serviceability floor of more than 7% is higher than necessary for ADIs (Australian deposit-taking institutions) to maintain sound lending standards,”

However, your household debt will still be taken into consideration.

According to an analysis done by Rate City, a family on an average household income of $109,688 would be able to borrow up to around $60,000 more if their loan was assessed at 6.25%.

For a single person in the same scenario, it allows him/her to borrow up to about $50,000.

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Wayne Byres said that the switch was justified by the ultra-low cash rate set by the RBA of 1%.

APRA’s chairman, Byres said: “The changes being finalised today are not intended to signal any lessening in the importance Apra places on the maintenance of sound lending standards,”

“This updated guidance provides ADIs (authorised deposit-taking institutions) with greater flexibility to set their own serviceability floors while maintaining a measure of prudence.”

Byres said that the new rules were appropriate in the current market.

The average interest rate on a standard variable rate loan is set to drop below 4% when lenders reduce mortgage costs, in response to this week’s second straight monthly reduction in the cash rate by the Reserve Bank.

“In the prevailing environment, a serviceability floor of more than 7% is higher than necessary for ADIs to maintain sound lending standards,” Byres said.

“Additionally, the widespread use of differential pricing for different types of loans has challenged the merit of a uniform interest rate floor across all mortgage products.”

When Apra first introduced the serviceability guidance in December 2014, the official cash rate was 2.5 percent in an effort to reinforce sound residential lending standards.

For nearly three years the cash rate was at a historic low of 1.5% before being cut in June and July by .25 percentage points, to reach its current 1%.

Four of the big banks have passed on the majority of the recent cuts to customers, however, they have pocketed some of the cut in the interests of savers, shareholders and their bottom line.

Byres said it is crucial that lenders remain vigilant since he acknowledged that Australian households were already highly leveraged.

“With many risk factors remaining in place, such as high household debt, and subdued income growth, it is important that ADIs actively consider their portfolio mix and risk appetite in setting their own serviceability floors,” Wayne Byres said.

“Furthermore, they should regularly review these to ensure their approach to loan serviceability remains appropriate.”

Byres said that a majority of the 26 submissions Apra received since May had supported its proposals.

Source: The Guardian

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