The prudential regulator may intervene with new limits on lending if the lower interest rate cycle results in “riskier forms of residential lending”.
The Australian Prudential Regulation Authority (APRA) has signalled its readiness to intervene with stricter lending limits if there is a resurgence in “risky” residential lending practices in a lower rate environment.
Speaking at the Australian Banking Association Conference 2025 on Thursday (24 July), APRA chair John Lonsdale highlighted the delicate balance the regulator seeks to strike between ensuring aspiring home owners can access credit and safeguarding the financial system from potential shocks.
While the regulator recently reaffirmed that its current macroprudential policy settings – including the serviceability buffer – are appropriate to mitigate financial stability risks at a system-wide level, he noted that the regulator was preparing to intervene, should lending risks rise as interest rates lower.
Indeed, while minutes from the Reserve Bank of Australia (RBA) showed that the central bank is taking a cautious approach to the current rate-easing cycle, the vast majority of economists expect at least two more rate cuts over the next six months.
Lonsdale explained: “Lending standards are currently sound, but looking ahead, one concern is that in the event of lower interest rates we could begin to see a rise in riskier forms of residential lending, which is historically what often occurs when the financial risk cycle picks up.
“It’s important to be forward-looking and prepared for potential risks at future points in the financial cycle.
“With that in mind, we will soon begin discussions with entities around implementation aspects of our various macroprudential tools to manage lending risks, including limits on some riskier forms of lending.
“We want to ensure such tools can be activated in a timely manner if needed.”
While the APRA chair did not specify what kind of “risky lending” this might entail, the regulator has previously suggested that large volumes of high debt-to-income ratios (typically over six times income) and high loan-to-value ratios (typically over 95 per cent) are considered risky.
The prudential regulator has also previously stepped in with lending limits to curb interest-only lending and investment lending surges. Currently, interest-only lending remains low, but there has been a spike in investor loans recently, with figures released by aggregator Australian Finance Group (AFG) earlier this month showing that investor loans made up more than a third of all lodgements in the final quarter of the financial year, rising to 34 per cent (just over 13,800 loans), the highest proportion seen in more than eight years.
Lonsdale reflected that home loans were “perhaps the most scrutinised area” when it comes to APRA striking the “right balance” with its macroprudential policy tools.
He told delegates: “As a society, we want aspiring homeowners to be able to access the credit they need on fair terms. And while recent data shows first home buyers remain well-represented in new lending, the relentless rise of property prices over recent decades has made it difficult for many borrowers – especially young adults – to buy a house.
“But we also recognise that it’s not in anyone’s interest for borrowers to be unable to meet their repayments. That’s bad for them, bad for their lender and potentially very bad for everyone. “
The APRA chair noted that the Australian banking system has more exposure to residential mortgages on variable interest rates than any other comparable economy, reflecting that residential mortgages make up two-thirds of all bank loans in Australia, compared to 30 per cent in Europe and only 10 per cent in the United States.
“Australians also have one of the highest levels of household debt relative to income in the world. As a result, we are uniquely exposed to a shock impacting households’ ability to repay their home loans,” he said.
“Using the macroprudential policy tools available to us, including the serviceability buffer, we try to strike a balance to ensure this risk is being adequately managed through sound lending standards, but that credit continues flowing to support the economy.”
[Related: APRA gives update on mortgage serviceability buffer]
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