RBA gives APRA’s use of macro tools a tick of approval
Ahead of an expected move to impose tougher lending rules on the banks, the Reserve Bank has looked into previous attemp...
Lenders across the country are continuing to introduce measures to crackdown on investor activity.
Smart Property Investment has previously reported that banks including Bankwest, CBA, ANZ and Westpac have introduced a raft of changes to their serviceability and borrowing requirements for investors as regulators try to reign in investor activity.
This week it has been announced that as of Friday, new variable rates will apply for NAB investment loans and Homeplus Low Doc Loans. NAB Broker has also reduced the maximum LVR (including LMI capitalisation) for investment loans to 90 per cent, and now requires customers to provide evidence of non-NAB loan repayments.
Furthermore, NAB’s affordability rate used in the serviceability assessment will be amended to be the higher of 7.40 per cent or 2.25 per cent above the effective borrower rate. A loading rate will also be applied on existing mortgage repayments as part of borrowers’ serviceability assessment.
NAB Broker general manager Steve Kane said the current low rate environment had helped to drive significant activity in the investor housing market, but the industry needed to ensure the growth remained sustainable.
“It’s important we make sure those borrowing money in the current environment can maintain their loan when rates inevitably increase,” he said.
In a speech at the COBA CEO & Director Forum in Sydney in May, Wayne Byres, chairman of the Australian Prudential Regulation Authority (APRA) said Australia needed to ensure it didn’t place its historically stable banking sector at risk.
“The current economic environment for housing lenders is characterised by heightened levels of risk, reflecting a combination of historically low interest rates, high household debt, subdued economic growth, and strong competitive pressures. Many of these features have been emerging over a number of years, and APRA’s supervision has been intensifying in response,” he said.
Mr Byres said as “housing-related risks have potentially grown” the regulator has sought to “turn up the dial” in terms of scrutiny and management.
APRA investigations into hypothetical borrower scenarios found that “common sense was sometimes absent” when it came to the banks’ treatment of borrowers’ income sources and credit assessment processes. He also said lending standards were “a little disconcerting in places”.
A particular area of concern arose in regards to lenders factoring in negative gearing benefits to investors’ serviceability calculations and failing to accurately account for investment property holding costs.
“Another area of interest was the discount of ‘haircut’ applied to declared rental income on an investment property. The norm in the ADI [Authorised Deposit-taking Institution] seems to be a 20 per cent haircut, but we noted in our exercise that some ADIs based their serviceability assessment on smaller, or even zero, haircuts,” Mr Byres said.
“Bearing in mind that the cost of real estate fees, strata fees, rates and maintenance can easily account for a significant part of expected rental income, and this does not take into account potential periods of vacancy, the 20 per cent norm itself does not seem particularly conservative. We also came across a few instances in which ADIs were relying on anticipated future tax benefits from negative gearing to get a borrower over the line for a mortgage.”
Smart Property Investment previously reported that Westpac has removed negative gearing from its serviceability calculations.
Pink Finance’s Nicole Cannon recently said she anticipates investors have an “interesting few weeks” ahead of them as more banks are expected to review their investor lending policies.