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APRA has told lenders they can immediately change the way they assess customers’ ability to meet mortgage repayments in Australia’s new low-interest paradigm.

As flagged two months ago, the Australian Prudential Regulation Authority has eased serviceability requirements by no longer expecting banks to ensure customers could still repay their loan if its interest rate increased to at least 7.0 per cent.

Lenders can from Friday set their own minimum interest rate floor and make their calculations using a 2.5 per cent buffer, which the prudential regulator has acknowledged could mean some people secure larger loans.

“The changes being finalised today are not intended to signal any lessening in the importance APRA places on the maintenance of sound lending standards,” APRA chairman Wayne Byers said.

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

Mr Byers said the new rules were appropriate in the current market.

The average interest rate on a standard variable rate loan is set to drop below 4.0 per cent 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 seven per cent is higher than necessary for ADIs to maintain sound lending standards,” Mr 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.”

The official cash rate was 2.5 per cent when APRA first introduced the serviceability guidance in December 2014 in an effort to reinforce sound residential lending standards.

It since spent nearly three years at a historic low of 1.5 per cent before being cut by 0.25 percentage points in both June and July to sit at its current 1.0 per cent.

Some economists are tipping the rate to fall to 0.75 per cent by Christmas and to 0.5 per cent next year, which would likely pull down consumer borrowing costs yet further.

All four of the big banks have passed on a majority of the past two months’ cuts to customers, although all have pocketed some of the cut in the interests of savers, shareholders and their bottom line.

Mr Byres acknowledged that Australian households were already highly leveraged and said it was crucial lenders remained vigilant.

“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,” Mr Byres said.

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

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