Mortgage interest rates may be near their all-time low, but people applying for a new loan will need to make sure they are able to afford a much higher rate when they inevitably rise in the future. .
Against the backdrop of rising domestic house prices at their fastest pace in more than 30 years and strong demand for mortgages, the banking regulator has asked the country’s lenders to increase the rate cushion ‘minimum interest when evaluating the usefulness of mortgage loan applications.
The Australian Prudential Regulation Authority (Apra) has told banks it expects them to assess the ability of new borrowers to repay their loans at an interest rate that is at least three percentage points higher. at the rate of the loan proceeds.
This compares to a 2.5 percentage point buffer that is commonly used today.
Apra’s move reflects growing financial stability risks associated with residential mortgages and is supported by other members of the Board of Financial Regulators (CFR), including the Reserve Bank of Australia, the Treasury and the Australian Securities Commission. securities and investments.
To determine its course of action, Apra also consulted the Australian Competition and Consumer Commission.
Apra Chairman Wayne Byres said it was targeted and thoughtful action designed to strengthen the stability of the financial system.
“By taking action, APRA is working to ensure that the financial system remains secure and that banks lend to borrowers who can afford the level of debt they take on – both now and in the future. ‘future,’ Byres said in a statement Wednesday. .
“While the banking system is well capitalized and lending standards have generally been maintained, the increase in the share of heavily indebted borrowers and indebtedness in the household sector in general means that medium-term risks for the financial stability accumulate. “
He said more than one in five new loans approved in the June quarter was more than six times the income of borrowers.
And at the aggregate level, growth in housing credit is expected to outpace that of household income over the coming period.
“While the economy is expected to rebound as lockdowns begin to be lifted across the country, the balance of risks is such that higher service standards are warranted,” Byres said.
He said regulators would continue to closely monitor residential mortgage risks and take further action if necessary.
The enhanced standards were announced at a CFR meeting last month where regulators also said Apra would work more on possible additional measures.
“The council recognizes that a period of credit growth significantly exceeding household income growth would increase the medium-term risks facing the economy, even if lending standards remain sound,” the council said.
He said Apra would also produce a background paper “on its framework for implementing macroprudential policy” in the next two months.
In a speech last month, RBA Deputy Governor Michelle Bullock said the bank “is watching the surprising and dramatic rebound in the housing market and wondering if there are any risks to the financial stability of these. developments and the concomitant increase in housing credit “.
She said the effect of an economic downturn could be compounded by high house prices when people who lost their jobs cut spending in order to meet their expanded mortgage payment obligations.
Lower house prices could also reduce spending because of the “wealth effect”, where people feel more secure when prices are high.
“Sharp declines in house prices could cause households to cut back on consumption, especially if they are heavily in debt, further exacerbating any downturn in the economy,” Bullock said.
With Australian Associated Press