Why APRA introduced home loan curbs, raised interest rate benchmark

October 06, 2021 09:52 AM AEDT | By Ashish

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Why APRA introduced home loan curbs, raised interest rate benchmark — Image source: © Khz | Megapixl.com

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Highlights

Australian Prudential Regulation Authority on Wednesday raised the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications.

APRA took the latest step in order to check growing lending risk.

The Australian housing sector has seen a rise in housing prices amid record-low interest rates.

In a much-anticipated move, the Australian Prudential Regulation Authority on Wednesday raised the minimum interest rate buffer it expects banks to use while evaluating the serviceability of home loan applications to check surging risks in home lending.

APRA told lenders it expects they will assess new borrowers’ ability to meet their loan repayments at an interest rate that is at least 3 percentage points above the loan product rate. This compares to a buffer of 2.5 percentage points that is commonly used by authorised deposit-taking institutions (ADIs) as of now.

Why APRA introduced home loan curbs, raised interest rate benchmark

The recent rise in the Australian housing prices emerged as a major concern for the Treasurer and regulators as they contemplated a crackdown on home loans to minimise risks emanating from the situation.

The housing prices rose as larger loans became easily available, fueling debt, amid record-low interest rates.

The major concern was that some borrowers may not be able to repay in case the interest rates rise, or they lose their jobs.

What APRA said

“In taking action, APRA is focused on ensuring the financial system remains safe, and that banks are lending to borrowers who can afford the level of debt they are taking on,” said APRA chairman Wayne Byres.

The boom in borrowing activity was initially led by end-users

Image Source: © Sarawutnirothon |Megapixl.com

In the June quarter, the number of new residential mortgages where debt was at least six times greater than income climbed to 21.9%, up from 16% in the corresponding quarter of previous year.

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