July 05, 2019

APRA published the revised prudential practice guide on residential mortgage lending (APG 223) for all authorized deposit-taking institutions in Australia. APG 223 summarizes the prudent lending practices in residential mortgage lending in Australia, including the need to address credit risk within the risk management framework, sound loan origination criteria, appropriate security valuation practices, the management of hardship loans, and a robust stress-testing framework. APRA also published the stakeholder responses and its response to the stakeholder submissions. The new guidance takes effect immediately.

This guide aims to outline prudent practices in the management of risks arising from lending secured by mortgages over residential properties, including owner-occupied and investment properties. It applies to authorized deposit-taking institutions as well as to other APRA-regulated institutions that may have exposures to residential mortgages. While APRA only supervises authorized deposit-taking institutions, responsible lending obligations apply to all lenders. ASIC is also consulting on the updated guidance in this area. APRA had originally introduced the serviceability guidance in December 2014 as part of a package of measures designed to reinforce residential lending standards. APG 223 should be read in conjunction with the Prudential Standard APS 220 Credit Quality (APS 220), Prudential Standard CPS 220 Risk Management (CPS 220), Prudential Practice Guide CPG 220 Risk Management (CPG 220), and Prudential Standard CPS 510 Governance (CPS 510).

APRA, in May 2019, had proposed revisions to its guidance with respect to the buffer and floor rates used in borrower serviceability assessments set out in APG 223. APRA has received 26 submissions from authorized deposit-taking institutions, industry associations, and other interested parties. The majority of submissions supported the direction of the proposals by APRA, although some respondents requested that APRA provide new or additional guidance on how floor rates should be set and applied. In a letter announcing the publication of APG 223, APRA has outlined its response to the main issues raised in submissions, including the following: 

  • Removal of the quantitative floor rate—APRA remains of the view that it is appropriate to remove the quantitative guidance on the floor rate from APG 223. APRA will still expect authorized deposit-taking institutions to determine, and keep under regular review, their own floor rate(s) based on the current position within the interest rate cycle and their portfolio mix and risk appetite
  • Raising the interest rate buffer—APRA remains of the view that, with the removal of the 7% serviceability floor from APG 223, the increase in the expected level of interest rate buffer will ensure that sufficient prudence is retained in authorized deposit-taking institutions’ serviceability assessments, accounting for the inherent uncertainty in lending decisions. APRA also considers that a buffer of 2.5% is appropriate in the current environment; however, APRA is open to reviewing the buffer rate, if needed, in the future.
  • Multiple floor and buffer rates—APRA considers it good practice to use a single set of serviceability criteria across all mortgage products; however, an authorized deposit-taking institution can choose to use different serviceability criteria, including multiple buffer and floor rates, for different products. Where an authorized deposit-taking institution chooses to do so, APRA expects the authorized deposit-taking institution to articulate the rationale for using differential criteria, along with any implications for the institution’s risk profile and risk appetite.


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Effective Date: July 05, 2019

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

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