APRA to change home loan assessment guidelines, but is it for the best?

Ceyda Erem

21 May 2019

redactor/hero-images/784/apra-home-loan_content.jpg

The Australian Prudential Regulation Authority (APRA) has made a proposal to adjust current serviceability assessments banks perform when sorting through prospective home loan borrowers.

When applying for a home loan, APRA expected banks to perform assessments to gauge whether a borrower would be able to meet their repayments if interest rates were higher than they are now - this was done by using a minimum interest rate of at least 7.00%, many banks currently use a rate of 7.25%.

Under the proposal, banks would be able to set their own minimum interest rate floor in serviceability assessments.

The regulatory body first introduced the assessment in December 2014 as an attempt to encourage responsible lending standards and limit excessive borrowing during a time when interest rates were low and household debt was high.

But while those issues may still be around, APRA Chair, Wayne Byres, explained that other changes in the property market led to the proposed removal.

“Although many of those risk factors remain - high prices, low interest rates, high household debt, and subdued income growth - two more recent developments have led us to review the appropriateness of the interest rate floor,” he said.

“With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7% floor and actual rates paid has become quite wide in some cases - possibly unnecessarily so.”

“In addition, the introduction of differential pricing in recent years - with a substantial gap emerging between interest rates for owner-occupiers with principal-and-interest loans on the one hand, and investors with interest-only loans on the other - has meant that the merits of a single floor rate across all products have been substantially reduced.”

A step in the right (or wrong) direction

Should the changes go ahead, Byres believes it would provide banks with greater flexibility when assessing potential customers as well as maintain an appropriate measure to determine a borrower's ability to meet monthly repayments.

However, Mozo’s Product Data Manager, Peter Marshall has expressed hesitancy toward APRA’s proposal.

“The serviceability assessment of 7% has always been recommended as a guide to banks when assessing home loan applications, which is probably a higher hurdle than required,” he said.

“Lowering this rate is a good idea, but I don’t think it’s an appropriate decision to put into play right now - it could be better to implement in a year once the property market subsides and stays steady.”

Marshall went on to explain his fears about borrowers biting off more than they can chew and that Aussie customers should be doing their homework thoroughly before heading to the bank.

“There’s been a lot of effort put into reigning in excessive lending and while this proposed change hasn’t yet come into effect, if it does, it may prompt buyers to borrow more and while that might be fine now you never know what the future holds,” he explained.

“Borrowers need to think seriously about what they’re getting into - you need to know whether you’re able to keep up with your repayments if rates rose or if your circumstances changed.”

If you’re a homeowner, find out if your budget could handle a rate rise by taking our home loan rate change calculator for a spin. Or if you’re ready to take the plunge and buy your first home, head on over to our home loan comparison tool.

Compare variable home loans - rates updated daily

  • Promoted

    loans.com.au

    3.03% p.a.

    3.05% p.a.

    $1234

    Product details Close details
    Smart Home Loan

    A low-rate home loan that could save you thousands. No application or ongoing fees. Unlimited additional repayments. Unlimited free redraws with no minimum redraw amount, Limited time only.

    • 3.03% p.a.

    • 3.05% p.a.

    • $520

    • $0.00

    • $0.00

    • yes - free

    • yes - free

    • no

    • 80.00%

    • $50,000

    • $1,000,000

    • Variable

    • Principal & Interest

    • Owner Occupier

    • Weekly, Fortnightly, Monthly

    Read our Mozo Review to learn more about the Smart Home Loan

  • Promoted

    UBank

    3.09% p.a.

    3.09% p.a.

    $1234

    Product details Close details
    UHomeLoan - Discount Offer

    One of Australia's leading digital banks. Easy & fast to apply. Free redraw with flexible repayments. Min. 20% deposit required. Low rate and no bank fees (on variable loans). Winner of a Mozo Experts Choice Award 2019 in the Low Cost Home Loan category.^

    • 3.09% p.a.

    • 3.09% p.a.

    • $0

    • $0.00

    • $0.00

    • yes - free

    • yes - free

    • no

    • 80.00%

    • $200,000

    • -

    • Variable

    • Principal & Interest

    • Owner Occupier

    • Weekly, Fortnightly, Monthly

    Read our Mozo Review to learn more about the UHomeLoan - Discount Offer

  • Promoted

    Athena

    3.09% p.a.

    3.05% p.a.

    $1234

    Product details Close details
    Variable Home Loan

    Low rates, no fees, and automatic rate match. New-comer Athena wants you to love them and leave them. Refinance only. Minimum 20% deposit.

    • 3.09% p.a.

    • 3.05% p.a.

    • $0

    • $0.00

    • $0.00

    • yes - free

    • yes - free

    • no

    • 80.00%

    • $100,000

    • $2,000,000

    • Variable

    • Principal & Interest

    • Owner Occupier

    • Weekly, Fortnightly, Monthly

    Read our Mozo Review to learn more about the Variable Home Loan

  • Promoted

    ANZ

    3.38% p.a.

    3.42% p.a.

    $1234

    Product details Close details
    Simplicity PLUS Special Offer LVR <80%

    Competitive low rate. No upfront or monthly fees. Flexibility to make extra repayments and redraw. Minimum 20% deposit required.

    • 3.38% p.a.

    • 3.42% p.a.

    • $0

    • $0.00

    • $160.00

    • yes - free

    • yes

    • no

    • 80.00%

    • $50,000

    • -

    • Variable

    • Principal & Interest

    • Owner Occupier

    • Weekly, Fortnightly, Monthly

    Read our Mozo Review to learn more about the Simplicity PLUS Special Offer LVR <80%

*WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for the amount and term you entered.

**Initial monthly repayment figures are estimates only, based on the advertised rate, and a loan of $500,000 repaid over 25 years. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

Mozo may receive advertising fees from the financial institutions, issuers of financial or credit products and third party advice providers that are shown on this page. These fees are based on a cost per click, cost per acquisition, or a fixed fee.