Prepare yourself for higher home loan interest rates. In a move likely to further push up mortgage costs, the bank regulator has flagged further actions that will put a handbrake on home lending, this time by insisting the banks hold bigger reserves in case the economy and the housing market turns ugly.

Key points: APRA flags "strategic moves" to discourage excessive property lending

APRA flags "strategic moves" to discourage excessive property lending Risk weights likely to be further increased on mortgages, lifting the cost of home loans

Risk weights likely to be further increased on mortgages, lifting the cost of home loans Bank regulator warns Australian banks have a "notable concentration in housing"

It is the second such move in less than a week. On Friday, the Australian Prudential Regulation Authority (APRA) announced a fresh limit on interest-only loans and a stricter approach to enforcing its speed limit on property investor lending.

In a speech on Wednesday at the Financial Review's Banking and Wealth Summit in Sydney, APRA's chairman Wayne Byres said that was merely a "tactical response" to address problems arising from a very hot south-east Australian property market in a low interest rate environment.

Mr Byres said the regulator was considering its longer-term position on financial stability and prudent lending practices, with housing again set to be a focus.

"A longer term and more strategic response will involve a review, during the course of our work on 'unquestionably strong', of the relative and absolute capital requirements for housing exposures," he told an audience filled with bankers.

"Capital requirements" is a term well known and very much disliked by bankers. Essentially, the regulator is ordering them to squirrel away extra cash, a buffer that adds another layer of safety to the banking system just in case a large number of loans turn sour and cannot be repaid. The downside is that it makes banks less profitable.

The issue of housing loans is further complicated by "risk weights", excellently explained by the ABC's Stephen Letts in an article from late-2014, ahead of the first regulatory crackdown on risky lending in December of that year and the Financial System Inquiry, which recommended the housing risk weights be increased.

Risk weighting allows the banks to hold less capital on certain assets that are considered safer.

Currently, the big four banks and Macquarie are allowed to calculate their own risk weights on housing, which got as low as the mid-teens before APRA introduced a floor of 25 per cent last year.

In effect, that means that banks need only hold a quarter of the capital against a residential mortgage that they would be required to for a business loan.

Unsurprisingly, that made mortgage lending very popular for the big four, so much so that property accounts for close to two-thirds of their business.

It now seems certain that this floor will be raised by APRA and, contrary to the expectations of many analysts, the regulator is not going to wait for the next international Basel IV agreement before taking action.

"Without clarity as to a deadline for an agreement in Basel, we have decided it does not make sense to wait any longer to deal with the question of 'unquestionably strong'," Mr Byres said.

APRA is planning to release a discussion paper about its proposals in the middle of the year, but Mr Byres did seek to allay concerns about the likely size of any impost.

"That should not be taken to imply that there will be a dramatic increase in capital requirements for housing lending: APRA has always imposed capital requirements for housing exposures that are well above international minimum standards, so we do not start with glaring deficiencies," he soothed.

"By anyone's standard, however, we have a banking system that has a notable concentration in housing.

"It is therefore important we give that issue particular attention as we think about how to put the concept of 'unquestionably strong' into practice."

Investor lending growth is again outpacing the rise in owner-occupier mortgages. ( Supplied: APRA )

APRA is not only dealing with a concentration in mortgage lending per se, but also the resurgent dominance of investors in the market, with the vast majority of them taking out interest only loans to maximise negative gearing claims and be able to service bigger loans.

The bank regulator's initial 2014 crackdown on investor lending had temporarily checked that segment of the market, but it has now returned with a vengeance.

What will increased risk weights mean for mortgage rates?

Capital costs banks - it is basically dead money that the bank cannot lend out - so the more of it they have to hold, the lower their profits will be.

That is, of course, unless the banks raise interest rates to compensate themselves for their increased costs.

Given the high concentration in Australia's banking sector - with the big four controlling around 80 per cent of the market - there has been a strong tendency for any extra regulatory costs to be passed straight through to customers.

This certainly happened with APRA's latest crackdown on interest-only lending and slight tightening of investor mortgages.

In fact, the banks moved their interest rates, particularly on interest-only loans, in the weeks before APRA announced its latest restrictions.

This is a pattern that has been evident since APRA started tightening lending rules and raising capital requirements on mortgages.

Investor interest-only interest rates have actually risen over the past couple of years. ( Supplied: APRA )

While the Reserve Bank's cash rate has gone down 1 percentage point over the past couple of years, owner-occupier mortgage rates have fallen just 60 basis points, investor loans around 10 basis points and interest-only investor loans have actually become more expensive.