In a letter to ADIs, the Australian Prudential Regulation Authority (APRA) has confirmed that it will proceed with its plans to remove its 7 per cent interest floor for mortgage serviceability assessments.
Instead, ADIs will be permitted 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.
APRA’s new guidance is effective immediately.
APRA received 26 submissions after commencing a consultation in May on proposed amendments to Prudential Practice Guide APG 223 Residential Mortgage Lending (APG 223). According to the regulator, the majority of submissions supported the direction of APRA’s proposals, although some respondents requested that APRA provide new or additional guidance on how floor rates should be set and applied.
Having considered the submissions, APRA chair Wayne Byres said APRA believes its amendments are “appropriately calibrated”.
“In the prevailing environment, a serviceability floor of more than 7 per cent is higher than necessary for ADIs to maintain sound lending standards. Additionally, the widespread use of differential pricing for different types of loans has challenged the merit of a uniform interest rate floor across all mortgage products,” Mr Byres said.
“However, with many risk factors remaining in place, such as high household debt and subdued income growth, it is important that ADIs actively consider their portfolio mix and risk appetite in setting their own serviceability floors. Furthermore, they should regularly review these to ensure their approach to loan serviceability remains appropriate.”
APRA originally introduced the serviceability guidance in December 2014 as part of a package of measures designed to reinforce residential lending standards.
Mr Byres concluded: “The changes being finalised today are not intended to signal any lessening in the importance APRA places on the maintenance of sound lending standards.
“This updated guidance provides ADIs with greater flexibility to set their own serviceability floors, while maintaining a measure of prudence through the application of an appropriate buffer that reflects the inherent uncertainty in credit assessments.”