MORTGAGE could become more accessible to Australians, as the Australian Prudential Regulation Authority embarks on a consultation process over easing its guidance of a minimum 7% interest rate for lenders’ serviceability assessments.
In a letter issued to lenders yesterday, APRA proposed removing its guidance that ADIs should assess whether borrowers can afford their repayment obligations using a minimum interest rate of at least 7%, and instead allow ADIs to review and set their own minimum interest rate floor while imposing an interest rate buffer of 2.5%.
Currently, APRA expects loan serviceability to be assessed using the higher of an interest rate floor of at least 7%, or a 2% buffer over the loan’s interest rate, with a preference for rates “comfortably above” those. Most ADIs use 7.25% and 2.25% respectively.
APRA is undertaking a four-week consultation closing 18th June.
APRA introduced the serviceability guidance in December 2014 to safeguard residential lending standards against excessive borrowing in a low interest rate and high household debt environment.
“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,” APRA chairman, Wayne Byres said.
“With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7% floor and actual rates paid has become quite wide in some cases – possibly unnecessarily so.
“In addition, the introduction of differential pricing in recent years – with a substantial gap emerging between interest rates for owner-occupiers with principal-and-interest loans on the one hand, and investors with interest-only loans on the other – has meant that the merits of a single floor rate across all products have been substantially reduced.
“The proposed changes will provide ADIs with greater flexibility to set their own serviceability floors, while still maintaining a measure of prudence through the application of an appropriate buffer to reflect the inherent uncertainty in credit assessments.”
Simply put, an application for a loan with an interest rate of 4% will be met with the lender testing to see the borrower could handle an interest rate of 6.5%.
The changes have further buoyed sentiment across the housing market following the Coalition’s shock federal election victory.
Labor’s proposed changes to negative gearing and capital gains taxes were perceived by some in the property industry as a threat to a weakened housing market in the throes of a pricing downturn and tight lending environment.
Managing director of research house SQM Research, Louis Christopher, said APRA’s note yesterday marked another significant move to loosen lending restrictions and place more responsibility on the banks to determine their own limits.
“This move should mean that more loan applicants will qualify for a loan and/or their borrowing limits will increase.”
He believes the Liberal victory means increasing buyer confidence in the market that was “severely lacking as a result of the anticipation” of Labor’s tax proposals.
SQM Research’s house price forecasts for 2019 factored in several scenarios, of which a Coalition victory at the election meant a likely national housing market price fall of between 1% to 4%, compared to its baseline scenario of what was a widely expected Labor win, no interest rate change and further slowing in the economy for a 3% to 6% price decline.
Christopher noted that the Coalition victory scenario did not take into account an earlier than expected rate cut, and that “there are an increasing number of economists” expecting rate cuts this year, perhaps as early as the first week of June, of up to 50 basis points.
“If there was such a cut over the course of June, July and/or August, it is likely the market would respond and demand for residential property would increase over and above our (Coalition victory scenario) forecast.”
Reserve Bank governor Philip Lowe hinted at a luncheon yesterday that interest rates were headed for a move further into historically low territory next month.
“A lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target,” he said, referring to the 2% to 3% inflation target that he said the Reserve Bank did not believe was achievable unless unemployment rates came down. Official data showed the unemployment rate had risen to 5.2% in April, having reached 4.9% earlier in the year.
Australian Property Journal