The Australian Prudential Regulation Authority (APRA) proposed a plan to banks to scrap the 7 per cent floor in mortgage serviceability assessments. The APRA has flagged lowering the home loan buffers to a level decided by banks and other lenders. This came as the second consecutive day of good news for the Australian banks after the Coalition victory.
The move was welcomed by the property sector and lenders as the proposal will ease the lending regulations and benefit the new home loan buyers. The APRA advised the banks to change the way they evaluated customers’ ability to meet their mortgage repayments and suggested lenders to use a 2.5 per cent rate buffer (increase from 2 per cent) for making serviceability calculations.
The step was taken considering the continuous drop in property prices, record-low credit growth, and anticipations over the Reserve Bank cutting interest rates this year.
In a recent announcement, the Reserve Bank of Australia (RBA) governor, Philip Lowe signalled the interest rates cut in June owing to the rise in the unemployment rate in April to 5.2 per cent.
The decline in the housing prices has been a cause of concern for the Australian economy. In early May, CoreLogic Inc. released hedonic home value index that indicated a fall in property prices in all the capital cities excluding Canberra. Prior to this, National Australia Ban’s securitisation analysts also anticipated a further fall in housing prices. Following this, the Australian Bureau of Statistics released data that demonstrated a fall in the dwelling approvals in March 2019.
Due to the declining property prices, the RBA also downgraded the near-term dwelling investment and consumption levels for Australia a few days back.
The proposed change in the lending regulations and the likely rate cut in June indicated by the RBA could help reverse a credit crunch that has weighed on home prices.
APRA’s serviceability buffers were introduced in December 2014, and since then, APRA has required the banks to calculate all home loans against 2 per cent above the rate paid by the borrower or a floor rate of 7 per cent, whichever was higher. Most of the banks have been using 7.25 per cent as the minimum interest rate floor, though the actual mortgage rates are 4 per cent or less.
According to the APRA Chairman Wayne Byers, the gap between the 7 per cent floor rate and actual rates paid has turned quite huge with the persistently low-interest rates. He believes that the proposed changes will probably improve the maximum borrowing capacity for a given borrower.
The shares of the leading banks of Australia – NAB, CBA, ANZ and WBC, rose following the APRA’s announcement. The Australian Securities Exchange ended up higher at 6500.1 points on 21st May with a rise of 0.4 per cent relative to the last close.
The below table shows the closing price (as on 21st May 2019) and the respective percentage gain (relative to the last close) in the stock price of the leading banks of Australia on the ASX:
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