Banks to raise serviceability buffers

In a letter to authorised deposit-taking institutions (ADIs), APRA told lenders it expects they will assess new borrowers’ ability to meet their loan repayments at an interest rate that is at least 3.0 percentage points above the loan product rate.

Currently, most banks use a buffer of 2.5 percentage points.

The increase in the interest rate buffer applies to all new borrowers.

It is estimated that the 50 basis points increase in the serviceability buffer would reduce maximum borrowing capacity for the typical borrower by around 5 per cent. 

APRA’s decision comes amid growing scrutiny of “growing financial stability risks” from banks’ residential mortgage lending (APRA said it was closely monitoring trends in non-ADI lending, but “did not consider there to be a basis for a policy response in relation to non-ADI lenders at this point in time”, noting that non-banks account for less than 5 per cent of total housing lending). 

Figures for the June quarter show that more than 20 per cent of ADIs’ new lending was to borrowers that had borrowed more than six times their pre-tax income.

APRA has noted that this is high by both historical and international standards – and without action, is likely to increase further (particularly once lockdowns lift in Victoria and NSW, the two most populous states). 

Given that household credit growth is expected to exceed household income growth for the forseeable future (and that rates will eventually rise), it is expected that household indebtedness will only rise, which “presents risks to the future financial stability”, APRA suggested.

The change has been supported by other members of the Council of Financial Regulators (CFR), comprising the Reserve Bank of Australia, the Treasury and the Australian Securities and Investments Commission (ASIC) and was made in consultation with the Australian Competition and Consumer Commission (ACCC). The group had met last month to discuss what measures could be taken to curb financial risks given growing levels of high debt-to-income lending.

APRA chair Wayne Byres commented: “In taking action, APRA is focused on ensuring the financial system remains safe, and that banks are lending to borrowers who can afford the level of debt they are taking on – both today and into the future. 

“While the banking system is well capitalised and lending standards overall have held up, increases in the share of heavily indebted borrowers, and leverage in the household sector more broadly, mean that medium-term risks to financial stability are building.

“More than one in five new loans approved in the June quarter were at more than six times the borrowers’ income, and at an aggregate level the expectation is that housing credit growth will run ahead of household income growth in the period ahead. With the economy expected to bounce back as lockdowns begin to be lifted around the country, the balance of risks is such that stronger serviceability standards are warranted.”

Together with other members of the CFR, APRA  said it would “continue to closely monitor risks in residential mortgage lending, and can take further steps if necessary”. 

[Related: RBA declares October cash rate]