Earlier this month, the Australian Prudential Regulation Authority (APRA) finalised its changes to its home lending guidance, in which it scrapped the 7 per cent interest rate floor for mortgage assessments and increased the buffer rate to 2.5 per cent.
As such, ADIs are now able to review and set their own minimum interest rate floor for use in serviceability assessments and utilise a revised interest rate buffer of at least 2.5 per cent over the loan’s interest rate.
Suncorp is one of a handful of banks that have already updated their assessment rates, with the lender cutting its interest rate floor from 7.25 per cent to 5.5 per cent and increasing its buffer from 2.25 per cent to 2.5 per cent.
Speaking at the time, a Suncorp spokesperson said: “This change will deliver positive benefits for customers wanting to enter the property market.”
However, speaking to Mortgage Business at the Suncorp Synergy Series event in Sydney on Wednesday (24 July), Suncorp’s Banking & Wealth CEO, David Carter, added that changing serviceability assessments would not likely result in a substantial uptick in loan applications.
Mr Carter noted that while mortgage approval rates were holding steady, mortgage application rates had “declined significantly”. For example, recent statistics from the MFAA show that brokers lodged 17 per cent fewer loans between April and September last year.
According to Mr Carter, the drop in applications was “consistent with a fall in house prices” and “consistent with customers feeling like it has all got a bit hard [to borrow]”.
He explained: “The [assessment changes] will allow some people into the market who may not [have already been in the market] and it will give people more confidence that their loan will be approved, which I think is important as it will give them confidence to apply.
“So, I think the changes are positive as they are good for confidence and confidence is good for the economy… But, personally, I don't believe it is going to lead to massive [influx of] loans in the market,” he said.
While Mr Carter said he believed the 2.5 per cent buffer was “sensible” as he believed it would be “unlikely that there will be 10 interest rises (or indeed, eight interest rate rises) happening in the next five years”, he said that even should such an eventuality occur, “it should be accompanied by income growth, which is what has been missing”.
“We need to make sure people aren’t entering into loans that they can’t afford, and that is a really important thing for both brokers and lenders to focus on because reputations are not going to be enhanced if we have people entering into loans they cannot afford.
“But importantly, from a community and society point of view, we don’t want people with commitments that are beyond them,” he said.
As such, the bank CEO said that “the key thing we all have to focus on in assessing the serviceability is probably going to be more about debt-to-income [ratios] going forward rather than any other measure”.
Mr Carter outlined that, in Sydney and Melbourne particularly, there has been a rapid increase in household debt to household income levels, which he said could be partly attributed to “people keeping debt longer in life”.
“I think that becomes the bigger focus now, rather than floor rates and buffers,” he said.
Mr Carter’s comments come as Moody’s Investors Service has suggested that the lower interest rate floors used by many Australian authorised deposit-taking institutions (ADIs) are “credit negative” for future residential mortgage backed securities (RMBS) but support existing deals.
“The lower interest rate floors will lift the borrowing capacity of home buyers and, as a result, increase the risk of defaults and losses for new mortgages and RMBS, but will likely also bolster demand in the housing market, supporting outstanding mortgages and RMBS,” Jacqui Dredge, a Moody’s analyst commented.
“At the same time, some of the risks are mitigated by the lower interest rates applied by lenders following the cuts in the official cash rate in June and July, and by the tightened underwriting practices of many ADIs with increased scrutiny in particular on borrowers’ expenses,” she said.
Moody’s has also noted that the lower interest rate floors will “amplify” the borrowing capacity of housing investors in cases where investors have existing home loan debt, as the updated calculations incorporate both new and existing debt amounts, which results in a proportionally larger increase in borrowing capacity for the new debt (compared with situations where there is no existing debt).
More to come.
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.