May 21, 2019

APRA is consulting on revisions to the prudential practice guide APG 223 on residential mortgage lending in Australia. The possible revisions to the guidance apply to the serviceability assessments that authorized deposit-taking institutions perform on residential mortgage loan applications. This four-week consultation closes on June 18, 2019.

Attachment A to the APRA letter on this consultation contains the text being modified in APG 223, which was earlier finalized in February 2017. APRA is seeking views on the proposed revisions to the guidance on the buffer and floor rates. APRA has proposed to:

  • Remove the quantitative guidance on the level of the serviceability floor rate, the reference to a specific 7% floor. APRA will still expect authorized deposit-taking institutions to determine, and keep under regular review, their own level of floor rate, but authorized deposit-taking institutions will be able to choose a prudent level based on their own portfolio mix, risk appetite, and other circumstances
  • Increase the expected level of the serviceability buffer from at least 2% (most authorized deposit-taking institutions currently use 2.25%) to 2.5%, to maintain prudence in overall serviceability assessments
  • Remove the expectation that a prudent authorized deposit-taking institution would use a buffer "comfortably above" the proposed 2.5%, to improve clarity of the prudential guidance.

APRA considers that these changes will provide greater flexibility for authorized deposit-taking institutions to manage and set floor rates that reflect the outlook for interest rates, while still ensuring that sufficient prudence is retained in serviceability assessments through the proposed higher buffer rate. This move is not intended to signal any lessening in focus on the importance of sound lending standards, but to simply acknowledge that the current interest rate environment and the introduction of differential pricing may not warrant a uniform mandated interest rate floor of 7% across all products. APRA continues to expect that authorized deposit-taking institutions apply the buffer to new and existing debt, recognizing that for certain types of mortgage products higher buffers may be appropriate.

APRA first introduced the serviceability guidance in December 2014 as part of its efforts to reinforce sound residential lending standards. The interest rate floor and buffer served an important purpose in limiting excessive borrowing in an environment of low interest rates and high household debt. The guidance was subsequently incorporated into Prudential Practice Guide APG 223 Residential Mortgage Lending, which APRA is now proposing to amend.


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Comment Due Date: June 18, 2019

Keywords: Asia Pacific, Australia, Banking, Residential Mortgage Lending, Guidance, APG 223, Credit Risk, APRA

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