The Australian Prudential Regulatory Authority (APRA) has announced that the 7% sensitised interest rate for new home loans is under review. APRA introduced the serviceability requirement for Authorised Deposit Taking Institutions (ADIs) in December 2014 requiring that all new home loans are assessed against a sensitised rate of either 2% above the current mortgage rate or 7%, whichever is the higher. Under the proposed changes, ADIs would “be permitted to review and set their own minimum interest rate floor for use in serviceability assessments”.
With the Reserve Bank of Australia (RBA) Cash Rate at record lows and ANZ currently forecasting a 25bps rate cut in September 2019 and a further 25 bps rate cut to 1.00% in December 2019, APRA has acknowledged that “the gap between the 7% floor and actual rates paid has become quite wide in some cases – possibly unnecessarily so”.
APRA goes on to state that “The changes, while likely to increase the maximum borrowing capacity for a given borrower, are not intended to signify any lessening in the importance that APRA places on maintenance of sound lending standards. Rather, it is simply recognition that the current interest rate environment does not warrant a uniform mandated interest rate floor of 7% across all products.”
BPFM considers the proposed review as a positive, supporting price and sale volumes across Australia which are currently subdued. Whilst there is a risk that borrowers will continue to increase their leverage, it is considered that the Banks have tightened their lending requirements, which includes a detailed review of income and expenditure to support actual serviceability.
Further updates will be provided following the four-week consultation, closing 18 June 2019.
Read the full APRA Media release here.