On Thursday (1 July), the Australian government will officially open the Family Home Guarantee (FHG), which provides eligible single parents with dependants the opportunity to build a new home or purchase an existing home with a deposit of 2 per cent (subject to the individual’s ability to service a home loan).
Ahead of the launch of the scheme, the Australian Prudential Regulation Authority (APRA) has now confirmed its treatment of residential mortgage loans issued under the FHG.
APRA has clarified that these loans would be subject to the same treatment as loans originated by authorised deposit-taking institutions (ADIs) under the government’s First Home Loan Deposit Scheme (FHLDS).
As such, loans subject to the FHG and FHLDS may be treated “in a comparable manner to residential mortgage loans with a loan-to-valuation ratio (LVR) of 80 per cent, and accordingly risk weighted at 35 per cent”.
This risk weight must be applied to the total amount lent to the borrower and “reflects the government guarantee and terms of the program”.
APRA added that once the government guarantee ceases to apply, ADIs must revert to calculating the regulatory capital requirement in line with the existing requirements of Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk. For ADIs that use the internal ratings-based approach to credit risk, there are no adjustments to the capital treatment of loans subject to the FHG or FHLDS.
For ADIs that use the standardised approach to credit risk, these banks may report FHG and FHLDS loans as having an 80 per cent LVR for capital purposes under Reporting Standard ARS 112.1 Standardised Credit Risk – On Balance Sheet Assets.
For all other regulatory reporting, ADIs must report the LVR of FHG and FHLDS mortgages according to the borrower’s actual equity contribution (this includes Reporting Standard ARS 223.0 Residential Mortgage Lending).
APRA added: “For internal risk management, including the measurement of risk appetite, APRA similarly expects that ADIs will monitor LVRs of FHG and FHLDS residential mortgage loans based on the borrower’s actual equity contribution.”
About the Family Home Guarantee
The initiative, which builds on the existing First Home Loan Deposit Scheme, will see 10,000 spaces made available over the next four financial years.
Treasury has estimated that there are 124,000 single-parent families that will be eligible for the scheme.
Following criticisms of the scheme’s initial property price caps, the government issued revised price caps for the properties that would be eligible under the scheme, increasing limits in all but one territory (ACT).
[Related: New FHLDS price caps welcomed]
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.