APRA Tightens Home Loan Requirements

Australia’s banking regulator tightened restrictions on home landing and flagged possible further action for the same. The easy availability of loans and rapid loan demand has fed the surge in housing prices which poses a risk to the financial stability of the country. 

The Australian Prudential Regulation Authority (APRA) has cracked down on risky lending by increasing the interest rate buffer borrowers need to be able to meet to receive a loan.

APRA estimated its higher benchmark for assessing home buyers' ability to repay loans would reduce a typical borrower's maximum borrowing capacity by about 5%. They told banks and other authorised lenders that borrowers will now need to be able to meet repayments at least 3 per cent higher than the loan product rate.

Previously, borrowers needed to be able to pay an interest rate up to 2.5% higher. This means now the maximum borrowing capacity for the average borrower will reduce by around 5%.

But the analysts also mentioned that less than one in ten borrowers ask for the maximum loan so the vast majority of borrowers will be unaffected by the change.

The decision is backed by Treasury, the Reserve Bank of Australia and the Australian Securities and Investments Commission, which together make up the Council of Financial Regulators.

Currently, the Australian property market is in upheaval due to surging property prices — the demand for houses is at an all-time high and the supply for the same is low. Such immediate measures are taken because the home prices are already 20% higher than last year even with coronavirus lockdown measures in major cities. It seems unlikely to be tamed that’s why the APRA analysts expect that further measures will be introduced.

Record low interest rates and the central bank’s reluctance to raise the cash rate from 0.1 per cent until 2024 are strong reasons why Australian house prices have risen sharply this year. This has led to angst about affordability and debt and it is becoming a risk to the financial stability of the country.  

More than 20% of the loans approved in the June quarter were for more than 6 times the borrower's income. Therefore it is predicted that the housing credit growth will outpace household income growth.

The APRA chairman Wayne Byres said, “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.”

“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 added.

The regulator had been cautious of changing serviceability buffers while large parts of Australia were in lockdown, and many were earning lower incomes. However, the lockdowns were gradually lifting so the APRA stepped in, predicting that the economy will bounce back.

Their decision is likely to impact the investors hardest as they tend to take loans on larger mortgages relative to their deposits, and they may already have other debts.

“On the other hand, first home buyers tend to be under-represented as a share of borrowers borrowing a high multiple of their income as they tend to be more constrained by the size of their deposit,” APRA said.

APRA’s decision comes after both Treasurer Josh Frydenberg and the RBA confirmed that lending standards and house prices were in their sights.

David Plank, head of Australian Economics at Australia and New Zealand Banking Group said, “In the context of the current strength of the housing market this is a modest change. Further macroprudential tightening seems more likely than not".

APRA said it will continue watching the residential lending sector and take further action if needed, warning that overly leveraged borrowers will be less resilient if they face a loss in income or increase in rates.