Yahoo Finance Banking watchdog just made it harder to get a loan
Australia’s lending regulator has cracked down on risky lending by increasing the interest rate buffer borrowers need to be able to meet to receive a loan.
The Australian Prudential Regulation Authority (APRA) told banks and other authorised lenders on Wednesday that borrowers will now need to be able to meet repayments at least 3 per cent higher than the loan product rate.
Also read: How to save $77,000 on your home loan for free (almost)
Also read: Singles to pay the price of increased housing regulation
Also read: Inflation is stirring – which is bad news for house prices
Previously, borrowers needed to be able to pay an interest rate up to 2.5 per cent higher. According to APRA, that means the maximum borrowing capacity for the average borrower will reduce by around 5 per cent.
The decision is backed by Treasury, the Reserve Bank of Australia and the Australian Securities and Investments Commission, which together make up the Council of Financial Regulators.
“APRA is focused on ensuring the financial system remains safe, and that banks are lending to borrowers who can afford the level of debt they are taking on – both today and into the future,” APRA chair Wayne Byres said.
“While the banking system is well capitalised and lending standards overall have held up, increases in the share of heavily indebted borrowers, and leverage in the household sector more broadly, mean that medium-term risks to financial stability are building.”
The RBA on Tuesday maintained its record low 0.10 per cent official cash rate, at the same time as Australian home values record their fastest pace of annual growth in 32 years.
More than 20 per cent of new loans approved in the June 2021 quarter were more than six times the borrowers’ income, APRA noted. It expects housing credit growth to continue outpacing household income growth.
“With the economy expected to bounce back as lockdowns begin to be lifted around the country, the balance of risks is such that stronger serviceability standards are warranted,” Byres said.
The regulator had been cautious of changing serviceability buffers while large parts of Australia were in lockdown, and many were experiencing lower incomes.
However, it said that as lockdowns are gradually winding down, now was the time to step in.
It expects its decision to hit investors hardest, as investors tend to take on larger mortgages relative to their deposits, and may already have other debts.
“On the other hand, first home buyers tend to be under-represented as a share of borrowers borrowing a high multiple of their income as they tend to be more constrained by the size of their deposit,” APRA said.
APRA’s decision comes after both Treasurer Josh Frydenberg and the RBA confirmed that lending standards and house prices were in their sights.
APRA said it will continue watching the residential lending sector and take further action if needed, warning that overly leveraged borrowers will be less resilient if they face a loss in income or increase in rates.
Take control of your money and learn to maximise it with the Women’s Money Movement! Join the club on LinkedIn and follow Yahoo Finance Australia on Facebook, Twitter and Instagram, and subscribe to the Women’s Money Movement newsletter.
