Last week, the Australian Prudential Regulation Authority (APRA) announced that it is proposing to remove its 7 per cent interest rate floor for home loan applications and increase its rate buffer to 2.5 per cent.
APRA chair Wayne Byres said the operating environment for ADIs had evolved in the past decade, prompting APRA to review the ongoing appropriateness of the current guidance.
The banking sector has welcomed APRA’s announcement, with CEO of the Customer Owned Banking Association (COBA) Michael Lawrence noting that it would reduce barriers for borrowers looking to enter the property market.
“APRA’s proposal should be welcome news for many Australians who can afford to get a home loan but who find themselves struggling to fit into the current serviceability buffers,” he told Mortgage Business.
“Lowering the interest rate floor by even 1 per cent could take off approximately $60 per week of the assessed repayment on a $400,000, 30-year loan.”
Mr Lawrence claimed that the changes would also strengthen competition between authorised deposit-taking institutions (ADIs) and non-ADIs that have been exempt from the serviceability buffer.
“The proposal could also help improve competition in the market by reducing the advantage enjoyed by non-ADI lenders who don’t have to comply with APRA regulations,” he added.
“More appropriate serviceability buffers mean more Australians will be able to borrow from customer-owned ADIs and won’t be forced to turn to riskier non-ADI lenders.”
Mr Lawrence’s remarks have provoked a response from non-bank lenders, which have rejected the COBA CEO’s assertions.
Daniel Carde, general manager, third party distribution, at Resimac said that the lender has adopted similar criteria for its assessment of mortgage applications, despite not officially being bound by APRA’s requirements.
“Whilst the APRA guidance with respect to residential mortgage lending is specifically directed at ADIs, as a prudent and responsible lender, Resimac consistently adopts the guidelines as set down by our regulator ASIC with respect to responsible lending conduct,” Mr Carde said.
“The guideline (RG209) provides similar detailed guidance as those provided by APRA under APG223.
“Resimac currently has a serviceability floor rate of 7.25 per cent that works in conjunction with a 2 per cent buffer.”
Mr Carde also noted Resimac’s obligations under the National Consumer Credit Protection (NCCP) Act.
“As a credit licensee, we are also required to comply with the responsible lending conduct obligations of the NCCP,” he said.
“The suggestion that non-ADIs are in some way a ‘risker’ proposition is simply unfounded.”
Firstmac managing director Kim Cannon also weighed in, accusing COBA of misreading the regulatory landscape.
“NCCP Responsible Lending provisions are regulated by ASIC and apply to all lenders regardless of whether you are an approved deposit taker or not,” Mr Cannon said.
“The COBA comment suggests a lack of understanding of regulatory oversight in Australia. The 7 per cent interest rate floor applies equally to banks and non-banks.”
Majors commence consultation with APRA
The Commonwealth Bank of Australia (CBA) and Westpac have also welcomed APRA’s proposal and have commenced consultation with the regulator.
A CBA spokesperson told Mortgage Business: “We note APRA’s announcement to remove its home loan serviceability guidance. We welcome the opportunity to consult with them over the coming weeks about the proposed changes.”
A Westpac spokesperson added: “Westpac welcomes APRA’s consultative process. Westpac recognises that it’s our responsibility to find the right balance that appropriately supports customers to buy homes and protects the quality of the bank’s mortgage book.”
ANZ CEO Shayne Elliott called for a revision to the interest rate buffer following the release of the bank’s half-year financial results.
“The purpose of it is to say, when we’re approving a loan today, we should make sure that this customer can afford to pay it if interest rates change in the future,” he said.
“The lower interest rates get, the less likely it is that rates will ever get to 7.25 per cent any time soon.
“At some point you need to rethink it.”
A four-week consultation will close on 18 June, ahead of APRA releasing a final version of the updated APG 223 shortly afterwards.
Charbel Kadib is the news editor on the mortgages titles at Momentum Media.
Before joining the team in 2017, Charbel completed internships with public relations agency Fifty Acres, and the Department of Communications and the Arts.