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

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.