In response to the Australian Prudential Regulation Authority’s (APRA) changes to its home lending guidance, Commonwealth Bank subsidiary Bankwest has lowered its interest rate floor for mortgage serviceability assessments from 7.25 per cent to 5.75 per cent and increased its interest rate buffer from 2.25 per cent to 2.5 per cent – in line with its parent company.
The non-major’s changes are effective for all new home loan applications submitted from Thursday, 25 July.
Bankwest joins the likes of ANZ, Westpac, the Commonwealth Bank, NAB, Macquarie, Suncorp, MyState Bank, Bendigo and Adelaide Bank, the Bank of Sydney, Auswide Bank, Teachers Mutual Bank and Advantedge, who have dropped their interest rate floors to as low at 5.3 per cent.
All the aforementioned lenders have also increased their buffer rates to 2.5 per cent, as per APRA’s guidance.
Borrowing capacity to rise by up to 23 per cent
According to a new analysis from Moody’s Investors Service, changes to APRA’s mortgage serviceability guidance would stimulate growth in the home lending space.
Moody’s observed that with most ADI’s having reduced their interest rate floors to between 5.3 per cent and 5.75 per cent, borrowing capacity could increase by between 17-23 per cent on a standard 30-year principal and interest home loan.
The ratings agency added that when incorporating the 2.5 per cent rate buffer, borrowing capacity would increase by approximately 14 per cent on a 30-year principal and interest mortgage with a 3.5 per cent interest rate.
Moody’s added that a rise in demand for housing finance would place upward pressure on house prices, which would in turn, reduce negative equity risk.
“[The] increased borrowing power of home buyers will support house prices and give existing borrowers more refinancing options, which will reduce the risk of losses in outstanding RMBS,” the ratings agency stated.
However, Moody’s claimed that the serviceability changes would “increase risks for new mortgages”, with borrowers taking on larger loan sizes.
Moody’s Investors Service also flagged risk associated with a rise in demand from investors, stating that lower interest rate floors would “amplify” property speculation.
According to Moody’s, an increase in the share of housing investment loans in RMBS portfolios would be “credit negative”, adding that housing investment loans are “riskier” than owner-occupier mortgages.
Moody’s concluded: “The increase in investor borrowing capacity, combined with better housing market sentiment, could increase investor participation in the housing market over the next several years.
“The share of housing investment loans to total mortgages has declined to 29.4 per cent in March 2019 since its peak in June 2015, but this trend could reverse if the improving sentiment translates into greater housing demand.”