APRA boosts lending buffer to cool home loan risks

APRA hopes changing the rules around how banks assess the serviceability of home loans will cool rising household debt levels.

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The Australian Prudential Regulation Authority (APRA) has bumped up the serviceability buffer in response to concerns around overall household debts. 

In a letter to lenders explaining the move, APRA said that it now expects authorised deposit-taking institutions to assess a new borrower’s ability to meet their loan repayments at an interest rate that is at least 3 per cent above the loan product rate. 

This change represents an increase in the 2.5 per cent buffer that was previously in place. 

“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,” APRA chair Wayne Byres said.


He noted that one in five new loans approved in the June 2021 quarter were more than six times that of a typical borrower’s income and that regulators expected housing credit growth to outpace income growth in the months ahead.

APRA said that these circumstances made the modification to the serviceability buffer the most appropriate mechanism by which they could look to intervene. 

“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,” Mr Byres said.

Describing the move as a targeted action designed to reinforce the overall stability of Australia’s financial system, Mr Byres revealed the move was supported by the rest of the Council of Financial Regulators and the Australian Competition and Consumer Commission. 

“In taking action, 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,” he said.

The regulator predicted that the impact of the change was likely to be greater for investors than it would be for owner-occupiers, as the former tend to borrow at higher level of leverage. 

Going forward, APRA said it would continue to closely monitor risks in residential mortgage lending, and can take further steps if necessary.

The regulator’s latest effort to cool the growth of high-debt home loans comes after months of speculation on the subject that painted as a matter of when rather than if. 

Last month, Treasurer Josh Frydenberg strongly indicated that a crackdown on high-debt home loans was imminent following discussions with the Council of Financial Regulators, including the RBA and the Australian Prudential Regulation Authority (APRA).

At that time, APRA confirmed it planned to release “an information paper on its framework for implementing macroprudential policy” in the coming months and that it would continue to consult with the Council of Financial Regulators on the potential implementation of any measures.

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