In a move likely to benefit home loan borrowers and reverberate through the wider property market, the Australian Prudential Regulation Authority confirmed it will remove the 7 per cent interest rate buffer for residential mortgage lending, “taking effect immediately”.
APRA announced on Friday it will proceed with the proposed changes on serviceability assessments flagged in May, announcing it no longer expects banks to assess home loan applications using the minimum interest rate of 7 per cent.
The buffer had been in place to ensure borrowers could make repayments on higher interest rates, with most banks applying a minimum rate of 7.25 per cent as industry standard.
The changes mean a family on an average household income of $109,700 could borrow up to around $60,000 more if their loan was assessed at 6.25 per cent instead of 7.25 per cent, analysis by Ratecity.com.au shows.
While a single person could borrow around $50,000 more.
As of Friday's announcement, lenders can now set their own serviceability minimums, as long as they apply a 2.5 per cent buffer over the loan's interest rate.
APRA put the measures in place in December 2014 to reinforce lending standards.
The change comes within the same week of the RBA cutting the cash rate to a historic low of 1 per cent, and the federal government’s $158 billion worth of tax cuts aimed to boost the economy.
APRA chair Wayne Byres said the serviceability floor of more than seven per cent was higher than necessary in maintaining lending practices.
“The changes being finalised today are not intended to signal any lessening in the importance APRA places on the maintenance of sound lending standards,” he said.
Byres said the updated guidance provides ADI’s with “greater flexibility to set their own serviceability floors”.
“While maintaining a measure of prudence through the application of an appropriate buffer that reflects the inherent uncertainty in credit assessments.”
Property Council chief executive Ken Morrison described the announcement as “a sensible decision” likely to provide a “welcome confidence boost”.
“It reflects the reality of the current interest rate environment and housing market conditions,” he said.
APRA received 26 submissions after its consultation in May on the proposed amendments, with the majority of submissions supporting APRA’s proposals.