Banks urged to be wary over new lending standards
THE nation’s banks have been warned by the industry watchdog not to let up on responsible lending standards as it presses ahead with moves to ease the housing credit squeeze.
Australian Prudential Regulation Authority chair Wayne Byres has urged banks to “actively consider” their risk levels under rule changes that came into effect yesterday.
The watchdog has told lenders they can immediately change how they assess whether prospective home loan customers would be able to meet their repayments. APRA had flagged the move in May.
Previously banks had to “stress test” home loan applications by assessing whether borrowers would be able to meet their repayments if their interest rate was at least 7 per cent.
Banks were also instructed to use a minimum benchmark “comfortably above” that level, and most of them applied a rate of at least 7.25 per cent to their stress tests. The buffer had been in place to ensure borrowers would be able to meet repayments if interest rates climbed.
But with rates in fact falling, parts of the industry had called for a review of the buffer, noting a reduction would also provide support for the stressed housing market.
Following the change, lenders will be able to set their own minimum “floor” for stress tests, as long as that rate has a buffer of at least 2.5 percentage points over the prevailing rate on the loan. For example, an application for a home loan with a 4 per cent interest rate would be stress tested using a rate of 6.5 per cent.
Mr Byres yesterday urged banks to “actively consider” the risk in setting their own standards.
“With many risk factors remaining in place, such as high household debt, it is important that (lenders) consider their portfolio mix and risk appetite in setting their own serviceability floors,” he said.