APRA Updates Loan Serviceability Expectations for Home Lending

The APRA decision, which reflects growing financial stability risks from authorized deposit-taking institutions’ residential mortgage lending, is supported by other members of the Council of Financial Regulators (CFR), comprising the Reserve Bank of Australia (RBA), the Treasury, and the Australian Securities and Investments Commission (ASIC). In determining its course of action, APRA also consulted with the Australian Competition and Consumer Commission. The APRA Chair Wayne Byres said this is a targeted and judicious action designed to reinforce the stability of the financial system. Along with other members of the CFR, APRA will continue to closely monitor risks in residential mortgage lending and may take further steps, if necessary. 

Under APG 223, the Prudential Practice Guide on residential mortgage lending, APRA expects that prudent authorized deposit-taking institutions would keep the level of the buffer under review to assess whether it remains appropriate in relation to the broader risk environment. Even with record low interest rates and increasing levels of lending at high multiples of borrower income, most authorized deposit-taking institutions have made no changes to their serviceability buffers and have let floor rates atrophy. APRA, therefore, also requests authorized deposit-taking institutions to review their risk appetites for lending at high debt-to-income ratios. While the use of a higher serviceability buffer will reduce risks for individual borrowers, growing portfolio concentrations of high debt-to-income loans also need to be monitored closely. Should concentrations of this lending continue to rise, APRA would consider the need for further macroprudential measures. If there is a further increase in key risk trends, APRA will consider additional measures. 

In addition to the near-term measures, APRA is also taking steps to ensure that macro-prudential policy more broadly is placed on a sound longer-term footing. Later this year, APRA plans to publish an information paper outlining its framework for macro-prudential policy, which will cover all capital and credit options. This information paper will set out:

• the APRA approach to macro-prudential policy, including objectives, the full toolkit of options, and implementation
• how APRA would apply macro-prudential policy to non-authorized deposit taking institutions lenders, should circumstances warrant it
• a process of consultation on proposals to embed macro-prudential policy tools more clearly in the formal prudential requirements of APRA

Related Links

• Media Release
• Letter

Keywords: Asia Pacific, Australia, Banking, Regulatory Capital, Credit Risk, APG 223, Basel, Macro-Prudential Policy, RRE, APRA