APRA Moves to Scrap 7pc Loan Buffer

In a move that is most likely to benefit owner-occupiers and the wider property market, the Australian Prudential Regulation Authority is proposing the 7 per cent serviceability buffer on home loans be removed.

With housing prices continuing to fall sharply in Sydney and Melbourne, APRA's unwinding of its restrictions is part of a coordinated action by the prudential regulator, central bank and government.

The decision, in the wake of the weekend's federal election, will provide banks with credit growth and reduce pressure on margins by lessening the need for rate cuts.

This may be more good news for the banks, following their big rise in the markets on Monday, but the news could also have negative implications on Australian household debt levels.

The banking regulator said it was putting its 7 per cent minimum interest rate "floor" under review, because the policy may have reached its use-by date after reviewing its "appropriateness".

APRA first introduced the serviceability guidance in December 2014 as part of its efforts to reinforce sound residential lending standards in an attempt to temper ballooning house prices and surging housing investor loan growth.

They required the banks to assess all home loans against a floor of 7 per cent or 2 per cent above the rate paid by the borrower, whichever was higher.

Banks have typically added a further 25 basis points to the 7 per cent threshold taking it to 7.25 per cent and a buffer of 2.25 per cent.

If the changes were to go ahead, authorised deposit-taking institutions (ADIs) would “be permitted to review and set their own minimum interest rate floor for use in serviceability assessments”.

“APRA introduced this guidance as part of a suite of measures designed to reinforce sound residential lending standards at a time of heightened risk,” APRA chairman Wayne Byres said.

“Although many of those risk factors remain – high house prices, low interest rates, high household debt, and subdued income growth – two more recent developments have led us to review the appropriateness of the interest rate floor.

“With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7 per cent floor and actual rates paid has become quite wide in some cases – possibly unnecessarily so.

“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.

“Rather, it is simply recognition that the current interest rate environment does not warrant a uniform mandated interest rate floor of 7 per cent across all products.”

The proposed revision comes as financial markets are anticipating the Reserve Bank will lower official interest rates to 1.25 per cent in the coming months.

In an attempt to rebound lending growth, APRA has been quick to support the banking sector, removing its 10 per cent growth cap on investor lending and 30 per cent limit on interest-only lending.

Lowering the floor could also provide some welcome support for the stricken housing market, following a 10 per cent slide in national house prices.

APRA has set a four-week consultation period on the proposals, closing on 18 June, but they are expected to be confirmed.