APRA ramps up serviceability buffer

The change will be more likely to impact certain types of borrowers, says the regulator

APRA ramps up serviceability buffer

Lending restrictions have been introduced to quell the growing property market and force banks to act more conservatively when assessing the serviceability of borrowers.

In a letter to ADIs on Wednesday, APRA said it would require banks to test whether new borrowers could afford the repayments on their loan if the interest rate went up by 3%. This marks a 50 basis point increase from the previous assessment rate of 2.5%.

APRA chairman Wayne Byres said this move was in response to household debt growing at a faster rate to income, as well the recent increase of borrowers with a debt-to-income ratio of six or more.

“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,” Byres 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.

“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. 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.”

APRA said it chose to increase the serviceability buffer rather than use an interest rate floor or limit the extent of high debt to income borrowing because it acted as a cap on leverage and would not have an impact on mortgage rates. It said this measure would be more likely to impact investors rather than owner-occupiers and first home buyers because investors tended to be more leveraged with other existing debts that the buffer would also apply to. First home buyers, on the other hand, tended to be under-represented as a share of borrowers borrowing a high multiple of their income due to the constraints of their deposit size.

APRA said that it and the other members of the Council of Financial Regulators would continue to monitor risks in residential lending and would take further steps if necessary. It did not rule out implementing limits on high debt to income borrowing in future.