The Australian Prudential Regulation Authority (APRA) has suggested lowering the minimum interest rate serviceability buffer from 7 per cent to a level determined by lenders.
The removal of the interest rate floor comes amid falling house prices, record-low credit growth, and expectations that the Reserve Bank will cut interest rates this year. The cash rate is currently at an all-time low of 1.5 per cent.
For the past four-and-a-half years, APRA has required banks to test prospective borrowers against the higher of either an interest rate of 7 per cent, or a 2 per cent “buffer” over the loan’s actual interest rate, to ensure they could meet repayments if rates rise.
The regulator also asked banks to ensure borrowers were “comfortably” above these thresholds, which has meant most banks test whether customers can manage repayments if interest rates hit 7.25 per cent, which is much higher than the actual mortgage rates, currently sitting below 4 per cent for many owner-occupier borrowers.
However, APRA chairman Wayne Byres said with interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7 per cent floor and actual rates paid “has become quite wide in some cases — possibly unnecessarily so.
“In addition, the introduction of differential pricing in recent years — with a substantial gap emerging between interest rates for owner-occupiers with principal-and-interest loans on the one hand, and investors with interest-only loans on the other — has meant that the merits of a single floor rate across all products have been substantially reduced.”
The proposed changes, while likely to increase the maximum borrowing capacity for a given borrower, “are not intended to signify any lessening in the importance that APRA places on the maintenance of sound lending standards,” Mr Byres added.
“Rather, it is simply recognition that the current interest rate environment does not warrant a uniform mandated interest rate floor of 7 per cent across all products.”