APRA has suggested banks change the way they assess customers’ ability to meet their mortgage repayments in a move analysts say will increase the amount people can borrow, and could even stem the fall in house prices.
The Australian Prudential Regulation Authority on Tuesday proposed removing guidance that customers should be able to repay their loan if their interest rate increased to at least 7.0 per cent.
It suggested recommending lenders instead make serviceability calculations using a 2.5 per cent rate buffer.
Moody’s senior credit officer Frank Mirenzi said the proposal would likely increase borrowing capacity and allow households to increase leverage, though he said a fresh housing boom was unlikely to follow.
“Banks have progressively tightened mortgage underwriting practices over a number of years, which mitigates the risks of a resurgence in excessive credit growth and another house price boom,” Mr Mirenzi said in a note.
APRA chairman Wayne Byers said historically and persistently low interest rates had left the 7.0 per cent mark unnecessarily high, while the gap between owner-occupier and investor rates meant a single rate was no longer as appropriate.
“”The changes, while likely to increase the maximum borrowing capacity for a given borrower, are not intended to signify any lessening in the importance that APRA places on the maintenance of sound lending standards,” Mr Byers said in a statement.
“Rather, it is simply recognition that the current interest rate environment does not warrant a uniform mandated interest rate floor of 7.0 per cent across all products.”
APRA is undertaking a four-week consultation period that closes on June 18.
It will then release updated guidance.
CoreLogic research analyst Cameron Kusher said the changes proposed by APRA seemed sensible given rates are expected to remain lower for longer.
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 has since been at its historic low of 1.5 per cent for nearly three years and is tipped by economists to fall as low as 1.0 per cent by the end of 2019.
Canstar said the average three-year fixed rate for owner occupiers had fallen from 4.99 per cent to 3.93 per cent since 2014, while the average standard variable rate had dropped from 5.30 per cent to 4.34 per cent.
In the last week alone, 12 lenders cut fixed owner-occupier rates, while nine lenders cut fixed investment rates, according to Canstar.
Meanwhile, Royal Bank of Canada macro rates strategist Robert Thompson said Tuesday’s proposal by APRA would enhance the effectiveness of any future rate cut by allowing serviceability assessments to track RBA movements more closely.
Shares in the nation’s big four banks rose in the wake of APRA’s announcement, and were between between 2.38 and 1.24 per cent higher at 1335 AEST.