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    APRA Updates Loan Serviceability Expectations for Home Lending

    October 06, 2021

    In a letter to the authorized deposit taking institutions, the Australian Prudential Regulation Authority (APRA) announced an increase in the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications. APRA now expects that banks will assess new borrowers’ ability to meet their loan repayments at an interest rate that is at least 3.0 percentage points above the loan product rate. This compares to a buffer of 2.5 percentage points that is commonly used at present. In case institutions continue to approve loans using a lower buffer rate beyond the end of October 2021, APRA will adjust the individual prudential capital requirements to reflect higher credit risk inherent in new 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


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

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