APRA removes investor benchmark

The curb was introduced in 2014 as part of a range of actions to reduce higher-risk lending and improve practices.

“In recent years, authorised deposit-taking institutions (ADIs) have taken steps to improve the quality of lending, raise standards and increase capital resilience,” the regulator said.

“APRA has written to ADIs... to advise that it is now prepared to remove the investor growth benchmark, where the board of an ADI is able to provide assurance on the strength of their lending standards.”

For the 10 per cent benchmark to no longer apply, Australian banks will be expected to confirm that:

• lending has been below the investor loan growth benchmark for at least the past six months;
• lending policies meet APRA’s guidance on serviceability; and
• lending practices will be strengthened where necessary.

For those banks that do not meet the required commitments, the benchmark will continue to apply.

The regulator said: “With risks in the environment remaining heightened, it will be important for ADIs to maintain prudent standards and close any remaining gaps in lending practices.”

APRA chairman Wayne Byres added that while the announcement reflects improvements that ADIs have made to lending standards, there is more to do to strengthen the assessment of borrower expenses and existing debt commitments, and the oversight of lending outside of policy.

“The temporary benchmark on investor loan growth has served its purpose. Lending growth has moderated, standards have been lifted and oversight has improved.

“However, the environment remains one of heightened risk and there are still some practices that need to be further strengthened. APRA is therefore seeking assurances from ADI boards that they will maintain a firm grip on the prudence of both policies and practices.”

As part of these measures, APRA also expects ADIs to develop internal portfolio limits on the proportion of new lending at very high debt-to-income levels, and policy limits on maximum debt-to-income levels for individual borrowers.

This will reportedly provide a “simple backstop to complement the more complex and detailed serviceability calculation for individual borrowers”, and takes into account the total borrowings of an applicant, rather than just the specific loan being applied for.

“In the current environment, APRA supervisors will continue to closely monitor any changes in lending standards,” the regulator said.

It added that the benchmark on interest-only lending will continue to apply but that APRA will consider the need for further changes to its approach as “conditions evolve”.

Some commentators have welcomed the move, with Teachers Mutual Bank Limited’s chief executive officer, Steve James, commenting: “We believe this will allow Firefighters Mutual Bank, Teachers Mutual Bank and UniBank and other mutual ADIs to increase competition in the market, and provide better banking options to Australian consumers. 

"The mutual sector has, and will continue, its strong governance standards with its superior focus on its members.”

Likewise, Mozo’s Steve Jovcevski saying that the removal of the cap could see further downward pressure on mortgage rates for investors.

“We’re expecting banks that may have previously shelved their investor loan business to keep within the growth limit, to start actively pursuing investors again with huge interest rate discounts,” Mr Jovcevski said.

“Already, we’ve seen lenders begin to take the knife to investor home loan rates as well as loosen up lending requirements over the last few months.

“APRA’s decision is likely to intensify this competition between the banks for a healthy investor loan book. The result is the gap between owner-occupiers and investor rates especially for principal and interest borrowers is likely to get smaller and smaller.”

He concluded: “APRA’s removal of the investor cap is expected to prop up growth in the cooling Sydney and Melbourne housing markets.

“As a result, the drop in both housing markets is unlikely to be as significant as predicted at the outset of the year had the banking regulator not removed the cap.”

[Related: What’s happening with investor loans?]