People may be eligible for larger home loans from Friday as Apra allows lenders to change the way they assess a customer’s ability to pay

This article is more than 1 year old

This article is more than 1 year old

The Australian Prudential Regulation Authority has taken the brakes off the struggling mortgage industry by telling lenders they can change the way they assess customers’ ability to meet repayments.

Two months ago Apra flagged changes to so-called serviceability requirements by no longer expecting banks to ensure customers could still repay their loan if its interest rate increased to at least 7%.

But the regulator, which has spent the last two years cracking down on loose lending, said on Friday that banks can set their own minimum interest rate floor and make their calculations using a 2.5% buffer.

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That means borrowers on a typical 4% mortgage rate can expect to be assessed at 6.25% rather than 7.25%, enabling them to immediately secure larger loans and possibly helping to reignite the moribund housing market.

Analysis by ratecity.com.au showed a family on an average household income of $109,688 would be able to borrow up to around $60,000 more if their loan was assessed at 6.25%.

The average single person would be able to borrow up to around $50,000 more under the same scenario.

The leading independent economist Stephen Koukoulas said Apra and the Reserve Bank were “trashing financial stability” with the move which comes despite clear signals from the banking royal commission of lax lending standards in the industry.

Stephen Koukoulas (@TheKouk) RBA & APRA are now trashing financial stability:

Lowe in 2017:

"Lower interest rates ... would have done so partly by encouraging people to borrow yet more money, thus adding to the risks ... this would not have been consistent with the broad mandate for economic stability"

Stephen Koukoulas (@TheKouk) Financial stability has been thrown out the window - hold on to your fezzes, chapeaus, fedoras, berets, bowlers, pork pies, fascinators, beanies, homburgs, boaters, akubras and deerstalkers!!! The credit fuse has been lit https://t.co/RUig9LGSNQ

However, Apra chief Wayne Byers defended the switch which he said was justified by the ultra-low cash rate set by the RBA of 1%.

“The changes being finalised today are not intended to signal any lessening in the importance Apra places on the maintenance of sound lending standards,” Apra chairman Byers said.

“This updated guidance provides ADIs (authorised deposit-taking institutions) with greater flexibility to set their own serviceability floors, while maintaining a measure of prudence.”

Byers said the new rules were appropriate in the current market.

The average interest rate on a standard variable rate loan is set to drop below 4% when lenders reduce mortgage costs in response to this week’s second straight monthly reduction in the cash rate by the Reserve Bank.

“In the prevailing environment, a serviceability floor of more than 7% is higher than necessary for ADIs to maintain sound lending standards,” Byres said.

“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.”

The official cash rate was 2.5% when Apra first introduced the serviceability guidance in December 2014 in an effort to reinforce sound residential lending standards.

It since spent nearly three years at a historic low of 1.5% before being cut by 0.25 percentage points in both June and July to sit at its current 1%.

Some economists are tipping the rate to fall to 0.75% by Christmas and to 0.5% next year, which would likely pull down consumer borrowing costs yet further.

All four of the big banks have passed on a majority of the past two months’ cuts to customers, although all have pocketed some of the cut in the interests of savers, shareholders and their bottom line.

Byres acknowledged that Australian households were already highly leveraged and said it was crucial lenders remained vigilant.

“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,” Byres said.

“Furthermore, they should regularly review these to ensure their approach to loan serviceability remains appropriate.”

Byres said a majority of the 26 submissions Apra received since May had supported its proposals.

Australian Associated Press contributed to this report.