Last week to comment on APRA’s serviceability proposals

The Australian Prudential Regulation Authority (APRA) launched a consultation in late May asking members of the financial services industry to respond to its proposals to revise its guidance on the serviceability assessments that banks perform on residential mortgage applications. 

Currently, in a bid to limit excessive borrowing in an environment of low interest rates and high household debt, APRA expects ADIs to assess loan serviceability using the higher of either:

• an interest rate floor of at least 7 per cent
• a 2 per cent buffer over the loan’s interest rate

However, in a letter to ADIs, APRA has proposed to revise its guidance to remove the 7 per cent requirement and instead allow ADIs to determine their floor rate levels. It is also looking to increase the interest rate buffer guide from 2 per cent to 2.5 per cent “to maintain prudence in overall serviceability assessments”.

APRA said it would still expect ADIs to determine and keep under regular review “a prudent level based on their own portfolio mix, risk appetite and other circumstances”.

Chair Wayne Byres said that given rates are at “record lows”, the gap between the 7 per cent floor and actual rates paid has become wider, adding that the advent of differential pricing has meant that the merits of a single floor rate across all products have been substantially reduced.

“The proposed changes therefore aim to 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,” he said.

The four-week consultation will close next Tuesday, 18 June, with APRA expected to release a final version of the updated APG 223.

[Related: APRA changes to limit pull of ‘riskier’ non-banks]