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APRA Standards Updated For Home Lending

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'APRA’ may well have been a name that was not very familiar to a majority of Australian homebuyers, that is until recently. Today however, APRA along with interest rates, house prices and housing affordability is a term, an organisation very much in the headlines, and the news behind those headlines is not (at least until recently) always welcome.

Before exploring why, and before looking at some recent positive news, I wanted to explore a little more of APRA’s background.

APRA is short for The Australian Prudential Regulation Authority, an independent statutory authority that supervises institutions across banking, insurance and superannuation and above all promotes financial system stability in Australia.

Accountable to the Commonwealth Parliament, APRA was established on 1 July 1998 following the recommendations of the Wallis Inquiry.

According to APRA’s website, prudential regulation is concerned with maintaining the safety and soundness of financial institutions, to ensure community confidence that the institutions will meet their financial commitments under all reasonable circumstances. However, while APRA seeks to reduce the likelihood of a financial institution failing, it does not, guarantee that failure may never occur.

APRA is tasked with protecting the interests of depositors, policyholders and superannuation fund members. APRA works closely with the Australian Treasury, the Reserve Bank of Australia (RBA), and the Australian Securities and Investments Commission (ASIC).

While there has been some recent critical comment about APRA’s role in managing home-loan terms and risk, and possibly as collateral damage influencing a ‘credit-crunch’ – it’s important to keep in mind APRA’s core responsibility: that promotes financial system stability in Australia. And history has shown that stability was vital during the GFC.

Community Values & Financial Responsibility.

In a speech: “After the storm: rebuilding trust in the wake of the royal commission” – given to general insurers by John Lonsdale, Deputy Chairman – Insurance Council of Australia at the 2019 Annual Forum, Sydney in February 2019, he said in part;

“Although APRA regards the Royal Commission as a positive for the financial services sector, the fallout has harmed companies and individuals who were shown not to have met the high standards the community – and the law – rightly expect.”

I suggest that this statement, when viewed against APRA’s task of helping to look after the wider financial interests of the community, does help to explain why, since late 2014 in particular, there’s been a cautious approach to how most banks/ADIs (authorised deposit-taking institutions) deal with their home loan customers.

APRA finalises amendments to guidance on residential mortgage lending

Last Friday, the 5 July 2019, APRA announced that it would (as had been widely expected) proceed with proposed changes to its guidance on the serviceability assessments that ADIs apply on residential mortgage applications.

APRA confirmed its updated guidance on residential mortgage lending no longer expecting ADIs to assess home loan applications using a minimum interest rate of at least 7%. Common industry practice has been to use a rate of 7.25%.

Now ADIs will be able to review and set their own minimum interest rate floor for use in serviceability assessments and utilise a revised interest rate buffer of at least 2.5% over the loan’s standard base interest rate.

The move came after APRA considered a range of industry submissions, and the policy was announced as follows:

“In the prevailing environment, a serviceability floor of more than 7% is higher than necessary for ADIs to maintain sound lending standards. Additionally, the widespread use of differential pricing for different types of loans has challenged the merit of a uniform interest rate floor across all mortgage products,” Spokesperson Wayne Byres said.

“However, with many risk factors remaining in place, such as high household debt, and subdued income growth, it is important that ADIs actively consider their portfolio mix and risk appetite in setting their own serviceability floors. Furthermore, they should regularly review these to ensure their approach to loan serviceability remains appropriate.”

APRA originally introduced the serviceability guidance in December 2014 as part of a package of measures designed to reinforce residential lending standards. However, at the time the residential market was in a very different place than it has been over the last 12-months.

In December 2014 APRA noted that it did not propose to introduce across-the-board increases in capital requirements, or caps on particular types of loans, to address the then current risks in the housing sector.

However, APRA at the time did flag to ADIs that it would pay particular attention to specific areas of prudential concern. These include:

  • higher risk mortgage lending — for example, high loan-to-income loans, high loan-to-valuation (LVR) loans, interest-only loans to owner occupiers, and loans with very long terms;
  • strong growth in lending to property investors — portfolio growth materially above a threshold of 10% as an important risk indicator;
  • loan affordability tests for new borrowers — APRA’s view was that, these should incorporate an interest rate buffer of at least 2% above the loan product rate, and a floor lending rate of at least 7%, when assessing borrowers’ ability to service their loans.

In last Friday’s announcement the APRA spokesperson made further to comment; “The changes being finalised today are not intended to signal any lessening in the importance APRA places on the maintenance of sound lending standards. This updated guidance provides ADIs with greater flexibility to set their own serviceability floors, while maintaining a measure of prudence through the application of an appropriate buffer that reflects the inherent uncertainty in credit assessments.”

The new guidance took effect immediately and have been generally welcomed by the banking and property industries. That’s despite the fact that there’s been some suggestion that the APRA rules were an over-reaction to market conditions in late 2014, and it’s reassuring that we have APRA acting in the wider interests of the community in maintaining a sound financial sector.

And I suggest that’s APRA’s role which, I’ve partly outlined, is of huge benefit for the entire country, especially if the economy ever hits choppy-waters again.

 


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Peter Chittenden

Managing Director | Residential

Residential

Sydney CBD

My professional knowhow stems from an extensive career in Residential property development, project marketing, site acquisition and property valuation.

I rejoined Colliers International 11 years ago as Managing Director, and since then I have worked to grow my team and our Residential division by more than 300%.

Across the country we have successfully launched and sold over 100 Residential projects, and we have played an instrumental role in every aspect of these successes for our clients.

I have built a team that offers the complete end to end service for our clients and customers alike, from the site aquisition right through to the sale and settlement of every last apartment. 

My 30+ years of experience in real estate, and genuine passion for property has seen me involved across numerous key industry bodies and groups, as well as the establishment of my own thought leading blog, projectagenda.com.au with over 4000 followers from within the industry. 

Prior to my time at Colliers International, I held the position of National Sales and Marketing Manager for Stockland Apartments. During his time I launched and managed a national portfolio of major projects and led a large national sales and marketing team. Prior to this, I started and ran my own successful project marketing company, Realm Project Marketing, for three years specialising in large land estates, housing and apartment projects predominantly in NSW, providing a high level of service that extended beyond the traditional sales appointment.

In my earlier role at Colliers International I was the National Director, Residential Land Marketing, where I established a highly successful division which led to the appointment of our business to project market several major estates in Sydney and Melbourne, which commenced long lasting relationships that our business still maintains today. 

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