The banking regulator has finalised its guidance for lenders on how they should assess loan serviceability, in a move tipped to make access to finance easier for investors.
Lenders and banks were told by the Australian Prudential Regulation Authority (APRA) that it will no longer be necessary to assess loan serviceability on the assumption of a 7 per cent interest rate.
Instead, the lenders will be in the driver’s seat, and authorised deposit-taking institutions (ADIs) will be able to set their own review standards, factoring in a buffer of at least 2.5 per cent interest.
The new guidance is effectively immediately for Australian lenders.
Commenting on the changes, APRA chair Wayne Byres said: “In the prevailing environment, a serviceability floor of more than 7 per cent is higher than necessary for ADIs to maintain sound lending standards.”
“Additionally, the widespread use of differential pricing for different types of loans has challenged the merit of a uniform interest rate floor across all mortgage products,” he said.
“However, with many risk factors remaining in place, such as high household debt and subdued income growth, it is important that ADIs actively consider their portfolio mix and risk appetite in setting their own serviceability floors,” he said.
In addition, Mr Byres said ADIs should continue to review their assessment criteria to ensure it is appropriate.
In the last two years, access to finance has been tougher for investors because of APRA’s stricter guidelines for interest-only loans. This latest move, combined with APRA lifting the restrictions on interest-only lending earlier this year, is tipped to make the mortgage market more flexible and accessible for property investors.