The Australian Prudential Regulation Authority (APRA) has announced that loans written under the federal government’s First Home Loan Deposit Scheme (FHLDS) will be awarded a capital treatment that is “comparable” to mortgages with a loan-to-value ratio (LVR) of 80 per cent.
This revised capital treatment was first outlined in APRA’s consultation letter to ADIs and has now been confirmed in its response letter.
In recognition of the fact that “the government guarantee is a valuable form of credit risk mitigation”, the regulatory body said it intends for FHLDS loans to be risk-weighted at 35 per cent, the same as loans with an LVR of 80 per cent.
The prudential authority noted that by treating FHLDS loans with the same risk weight as 80 per cent LVR loans, lenders would be able to offer first home buyers a competitive interest rate.
Additionally, under the revised capital treatment, once the government guarantee ceases to apply to eligible loans, authorised deposit-taking institutions (ADIs) would revert to applying the usual relevant risk weights, APRA said.
In October, APRA announced its proposal to adjust the capital requirements for ADIs writing loans for the FHLDS.
Since publishing the consultation letter on 28 October 2019, APRA received 10 submissions from interested parties, most of whom were “generally supportive” of APRA’s proposed capital treatment of guaranteed loans under the FHLDS.
Respondents noted that the proposed capital treatment would allow lenders to offer FHBs a competitive rate, and without the change, current capital requirements may adversely affect lender appetite for FHLDS loans.
However, some respondents expressed concern that the proposed capital treatment does not adequately reflect the risks associated with loans to first home borrowers and suggested that FHLDS mortgages should be treated within APRA’s existing guarantee framework, or be afforded the same risk weight treatment as mortgages covered by lender’s mortgage insurance (LMI).
Further, it was suggested that APRA’s proposed approach creates a “regulatory distortion” between loans covered by a government guarantee and those covered by LMI, and that this does not reflect an “appropriate balancing of competition, competitive neutrality and contestability considerations”.
Despite the concerns, APRA has announced that it is proceeding with the capital treatment of FHLDS loans as comparable to 80 per cent LVR loans, with a risk weight of 35 per cent.
APRA stated that it considers the revised capital treatment of FHLDS mortgages as “simple to implement”, which also appropriately reflects “the value of the government’s guarantee as a form of credit risk mitigation”, and will improve competition for the provision of these loans.
APRA will reportedly be contacting the ADIs that have been selected as a participating lender in the scheme by the National Housing Finance and Investment Corporation with formal written approval to apply the adjusted capital treatment.
The full lender panel to be involved in the scheme will be announced on or before 20 December 2019, with the scheme due to commence on 1 January 2020.