Decoding APRA Home Lending Changes
‘APRA’ may well have been a name that was not very familiar to a majority of Australian homebuyers, that is until recently. Today however, APRA along with interest rates, house prices and housing affordability is a term, an organisation very much in the headlines, and the news behind those headlines is not (at least until recently) always welcome.
APRA is the independent statutory authority that supervises institutions across banking, insurance and superannuation and promoting financial system stability. The group is tasked with protecting the interests of depositors, policyholders and superannuation fund members, working closely with the Australian Treasury, the RBA and ASIC.
On July 5, APRA (The Australian Prudential Regulation Authority) announced proposed changes to its guidance on serviceability assessments.
The changes mean APRA no longer expects authorised deposit-taking institutions (ADIs) to assess home loan applications, using a minimum interest rate of at least 7%. Common industry practice has been used to a rate of 7.25%.
Now the ADIs will be able 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% over the loan’s standard base interest rate.
Peter Chittenden, Managing Director Residential said “Colliers International are very supportive of these changes by APRA. We are starting to see signs of improvement across the residential market and overall there is more activity and positive noise. Across our display suites we are already seeing an increased number of buyers coming through and more sales enquiries since the changes have come into effect,”
“The changes will be beneficial for the entire country and especially for First Home Buyers; for the average loan these changes mean an extra $50,000 - $100,000 in lending which can make a huge difference for someone looking to purchase their first property.”
APRA originally introduced the serviceability guidance in December 2014 as part of a package of measures designed to reinforce residential lending standards. However, at the time the residential market was in a very different place than it has been over the last 12-months.
In December 2014, APRA noted that it did not propose to introduce across-the-board increases in capital requirements, or caps on particular types of loans, to address the then current risks in the housing sector.
However, APRA at the time did flag to ADIs that it would pay particular attention to specific areas of prudential concern. These include:
- higher risk mortgage lending — for example, high loan-to-income loans, high loan-to-valuation (LVR) loans, interest-only loans to owner occupiers, and loans with very long terms;
- strong growth in lending to property investors — portfolio growth materially above a threshold of 10% as an important risk indicator;
- loan affordability tests for new borrowers — APRA’s view was that, these should incorporate an interest rate buffer of at least 2% above the loan product rate, and a floor lending rate of at least 7%, when assessing borrowers’ ability to service their loans.
In the original announcement on 5th July, the APRA spokesperson made further to comment; “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.”
The new guidance took effect immediately and have been generally welcomed by the banking and property industries. That’s despite the fact that there’s been some suggestion that the APRA rules were an over-reaction to market conditions in late 2014, and it’s reassuring that we have APRA acting in the wider interests of the community in maintaining a sound financial sector.
“Whilst the APRA changes are positive to the industry, we now need to look at shortening the loan approval time. The length of time it takes to have your loan approved is longer than ever and now that the banks have taken on the APRA changes, next steps should be to review and action this,” said Peter Chittenden.
Now that changes have been made, the next question to ask is does the average home loan application really need to take as long as it currently does or and should the major lenders look to change?