James Frost| Australian Financial Review| 5 July 2019
The economy is poised to receive a triple whammy of policy stimulus in a single week following a second consecutive rate cut, passage of the federal government’s $158 billion tax plan and the removal of a key handbrake on home lending.
Australian Prudential Regulation Authority chairman Wayne Byres announced its decision to scrap the 7 per cent serviceability floor on borrowers effective immediately in a move that is expected to increase borrowing capacity by up to 14 per cent.
Analysis by UBS shows that a couple earning a combined $200,000 with two children paying a comparison rate of 3.5 per cent will have an additional $150,000 borrowing capacity.
Mr Byres said after careful consideration the regulator had decided to remove the buffer that forced banks to assess every loan against the borrower’s ability to repay it at 7 per cent. It is the third lending benchmark to be relaxed by APRA in the last 12 months.
“In the prevailing environment, a serviceability floor of more than seven per cent is higher than necessary for ADIs to maintain sound lending standards,” Mr Byres said.
The move to give home buyers hundreds of thousands of dry powder will provide important support to an increasingly fragile property market. Over the last 12 months house prices in Sydney and Melbourne have fallen by more than 9 per cent.
The additional firepower granted to home buyers comes hard on the heels of Prime Minister Scott Morrison’s package of tax cuts targeting low-income earners which will see $7.6 billion in tax refunds paid out within weeks.
Under the old regime banks were asked to reject borrowers who were unable to service a loan at 7 per cent or a rise of 200 basis points, whichever was higher. Banks typically add another 25 basis points on top of APRA’s guidelines.
As rates moved lower, more investors were getting rejected because they were unable to meet a rate of 7 per cent. Under the new arrangement a borrower paying a comparison rate of 4 per cent will be assessed against their ability to repay at 6.5 per cent.
ANZ Bank CEO Shayne Elliott said the artificial floor was seeing a sizeable number of borrowers knocked out of the approval process at the bank’s half year results saying it was time to “rethink” the process.
A spokesman said on Friday the review was sensible and it would begin implementing the changes to its systems and processes.
Mr Byres said in May the regulator was concerned that the gap between the floor and the actual rates paid had become “unnecessarily wide”.
UBS analysis shows under the new arrangement which replaces the 7 per cent floor with a buffer of 250 basis points, a couple earning $200,000 a year with two children would have their borrowing capacity raised from $1,097,000 to between $1,184,000 and $1,249,000.
Managing director of mortgage broking franchise Mortgage Success Katrina Rowlands said at the new rate of 250 basis points above the actual rate paid, cuts from the Reserve Bank will finally have an impact.
“People can actually afford to borrow the money they need to buy a house. This is common sense and will now allow the housing market to progress again,” Ms Rowlands said.
Two weeks ago The Australian Financial Review revealed the regulator had forced Westpac into an embarrassing back down after the bank admitted that it had jumped the gun and removed the lending handbrake.
APRA was furious the bank had moved before official guidance was released and made its displeasure known. Westpac subsequently reinstated the benchmark soon after.
A spokesperson for Commonwealth Bank said it had worked closely with the regulator during the consultation period and supported the change.
“We will now review our serviceability rates based on the new guidance while taking into consideration our portfolio mix and risk appetite,” the bank said.