Lower floor rates having ‘small’ impact on demand

The Council of Financial Regulators (CFR) has released its latest Financial Stability Review, in which it assesses risks in the domestic and international markets.

The CFR – which consists of the Reserve Bank of Australia (RBA), the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), and Treasury – noted APRA’s decision in July to scrap its 7 per cent interest rate floor for mortgage serviceability assessments.

The regulators noted that the new guidance was introduced to align with a “prolonged period of record low interest rates”, and acknowledged that the “net effect” of the changes has been to “increase the maximum loan size available to most prospective borrowers”.

Several analysts have observed that the changes would help stimulate demand for credit and contribute to a recovery in the housing market by boosting borrowing capacity by up to 23 per cent.  

However, the CFR said that it expects APRA’s new guidance to have a minimal impact on credit growth, claiming that most borrowers don’t exhaust their borrowing capacity.   

“For loans with relatively low interest rates such as principal and interest loans to owner-occupiers, maximum loan sizes have increased by more than for loans with higher interest rates such as interest-only loans to investors,” the CFR stated.

“In practice, however, only a small share of borrowers take out loans that are close to the maximum available to them, suggesting the overall impact on credit growth is small.”

The CFR’s sentiment is shared by CEO of the Commonwealth Bank of Australia (CBA) Matt Comyn.

“We’re seeing, and we would expect to see, a rather modest effect from [the APRA revision],” he said in August.

“As we’ve previously disclosed, almost 90 per cent of borrowers don’t borrow at the maximum, so the application of where the floor [is set] impacts someone who wants to borrow at the maximum.

“As you’d expect, across multiple different borrower types and circumstances, it depends on what the benefit will be from the floor. For example, if you’re an owner-occupied, principal and interest borrower, [the changes would] potentially have the greatest effect.”

Mr Comyn largely attributed the recently reported recovery in credit and housing market conditions to a general improvement in market sentiment.

“I think the stabilisation in house prices and the slight improvement in credit growth is probably due to a broader [improvement in sentiment] rather than the APRA changes,” he added.

[Related: Majors to hold off on further changes to serviceability rates]