Australia banking watchdog tightens home loan requirements

October 5, 2021

SYDNEY (Reuters) – Australia’s banking regulator on Wednesday tightened restrictions on home lending as rapid loan growth fed surging prices and posed a risk to financial stability.

The Australian Prudential Regulation Authority (APRA) increased the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications.

APRA said it told lenders it expects they will assess new borrowers’ ability to meet their loan repayments at an interest rate that is at least 3.0 percentage points above the loan product rate. This compares to the current buffer of 2.5 percentage points.

“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,” APRA Chair Wayne Byres said in the statement.

With record low interest rates and a central bank reluctant to raise the cash rate from 0.1% until 2024, Australia’s house prices have risen sharply this year, leading to much angst about affordability and debt.

Over a fifth of new loans approved in the June quarter were for more than 6 times the borrower’s income, and housing credit growth is expected to outpace household income growth, the regulator said.

“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,” Byres said.

Given some borrowers are already constrained by the floor rates that lenders use, and that many borrowers do not borrow at their maximum capacity, the overall impact on aggregate housing credit growth flowing from this is expected to be fairly modest.

In a letter to banks, the regulator asked them to review their risk appetite for lending at high debt-to-income levels, warning that if such lending continued to grow, it would consider further macroprudential intervention.

(Reporting by Wayne Cole and Paulina Duran; Editing by Chris Reese and David Gregorio)

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