Australian Prudential Regulation Authority banking regulator reaffirms lending buffer rules

By William On Feb 28, 2023

Australians will have a harder time getting a home loan as the banking regulator refuses to budge on strict lending rules, but one financial expert says it’s time for a change.

All the big banks expect more interest rate hikes from the Reserve Bank in the coming months to deal with the worst inflation in 32 years.

More rate increases mean someone who wants a home loan can’t borrow as much, while strict lending rules make it more difficult for a struggling borrower to refinance a loan.

Australia’s Prudential Regulation Authority reaffirmed on Monday that banks will continue to be required to assess a borrower’s ability to cope with a three percentage point increase in variable mortgage rates.

Chairman John Lonsdale said a higher threshold was needed, which had been in place since November 2021.

Australians will have a harder time getting a home loan as banking regulator refuses to budge on strict lending rules (Sydney auction pictured)

What an average Australian can borrow

Canstar calculated that an Australian with an average full-time salary of $94,000 could now borrow $436,000.

But this individual’s borrowing capacity would have been $21,000 higher, to $457,000, if the Australian Prudential Regulation Authority’s loan buffer was still at 2.5 percentage points instead of 3 percentage points.

That’s the difference between being able to buy a $545,000 home or a $571,250 home with a 20 percent down payment.

“On that basis, we believe that our current macroprudential policy settings remain appropriate,” he said.

“In particular, APRA’s view is that the 3 percent level remains prudent given the potential for further increases in interest rates, high inflation and risks in the labor market.”

But Effie Zahos, managing editor at Canstar, said the tighter mortgage buffer was becoming less necessary, and the Reserve Bank was expected to stop raising rates from June.

“As we reach the maximum rate cycle, which we clearly haven’t, APRA would have to look at this again as it is affecting service capacity,” he said.

Westpac, ANZ and NAB expect the Reserve Bank of Australia to raise interest rates in March, April and May to an 11-year high of 4.1 percent, while the Commonwealth Bank forecasts a cash rate of 3 .85 percent.

Ms Zahos argued that these rate increases meant that existing banking regulator rules would make it more difficult for existing borrowers to refinance.

“Ironically, the very regulation designed to protect consumers is working against borrowers in foreclosure,” he said.

APRA’s mortgage cushion was increased to 3 percentage points, up from 2.5 percentage points, in November 2021, when the RBA cash rate was still at a record low of 0.1 percent.

But Effie Zahos, managing editor at Canstar, said the tighter mortgage buffer was making it harder for Australians to get a loan or refinance, leaving them in “mortgage prison”.

Fixed-rate borrowers face a 69% increase in repayments

$500,000: Up to $1,444 to $3,543 from $2,099

$600,000: Up to $1,733 to $4,251 from $2,518

$700,000: Up to $2,022 to $4,960 from $2,938

$800,000: Up to $2,304 to $5,662 from $3,358

$900,000: Up to $2,592 to $6,370 from $3,778

$1,000,000: Up to $2,881 to $7,078 from $4,197

The repayment increases reflect that the borrower, with a 25-year loan, earned a fixed rate of 1.92% in May 2021 and went directly to a variable ‘reversal’ rate of 7.41% to 7.43% in May 2023. That’s based on the Reserve Bank Cash Rate rising three more times to 4.1 percent. The fixed-rate contracts had fine print explaining that borrowers would pass at a rate that was 3.33 percent above the RBA cash rate. The reversal rates with the big four banks would be 7.41 percent for loans of more than $750,000

Canstar calculated that the increased margin meant that an Australian earning an average salary of $94,000 could now only borrow $436,000, compared to $457,000 under the previous rules.

That $21,000 difference in borrowing capacity means that someone with a 20 percent mortgage deposit could now only buy a $545,000 worth of home or unit, compared to a price of $571,250 if the cushion applied. former.

The RBA has, since May 2022, raised the cash rate nine times to a 10-year high of 3.35 percent.

This has marked the most severe pace of monetary policy tightening since the Reserve Bank first published a target cash rate in 1990.

Australians who took out a fixed-rate loan in May 2021 at 1.92 percent face an abrupt change to a variable ‘reversal’ rate of 7.43 percent in 2023 when the two-year period expires, it calculated. RateCity.

This would mean a 69 percent increase in monthly payments unless a borrower could refinance.

A borrower with an average mortgage of $600,000, with a term of 25 years, would go from paying $2,518 a month to $4,251.

Credit ratings agency Moody’s Investors Service defended the banking regulator’s tough rules, arguing they were necessary as more borrowers are likely to fall 30 days or more behind on their mortgage payments as interest rates rise.

“We expect mortgage delinquency rates to rise during 2023 as rising interest rates, high cost of living pressures and a slowing economy will weigh on borrowers’ ability to repay debt,” he said.

Moody’s argued that the Australian mortgage industry was “in a stronger position in the current housing market downturn” compared to the 2008 global financial crisis.

“Risky lending has declined, macroprudential policies have improved underwriting standards, and lenders are more likely to support homeowners than in the past,” he said.

“The risk of mortgage delinquency would have been much higher if loan quality, underwriting standards and the propensity of lenders to support borrowers had not improved since the financial crisis.”

Inflation last year soared to 7.8 percent, a level well above the RBA’s 2-3 percent target.

Canstar calculated that the increased margin meant that an Australian earning an average salary of $94,000 could now only borrow $436,000, compared to $457,000 under the previous rules. That $21,000 difference in borrowing capacity means that someone with a 20 percent mortgage deposit could now only buy a $545,000 worth of home (home in Bellmere near Caboolture in Queensland, pictured), compared to a $571,250 price if old damper still applies