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Serviceability changes could be ‘offset’ by expense process

by Tas Bindi4 minute read

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The positive impact of APRA’s proposal to allow banks to set their own serviceability floors could be “offset” by other developments, such as changes to expense verification processes, a new report has warned.

Westpac’s latest Housing Pulse report for May 2019 claimed that the Australian Prudential Regulation Authority’s (APRA) proposal revising its guidance to remove the minimum 7 per cent requirement and instead allow authorised deposit-taking institutions (ADIs) to determine their own floor rate levels, as well as increase the interest rate buffer guide from 2 per cent to 2.5 per cent, would constitute a “significant easing in borrowing conditions”.

“At this stage, the regulator is seeking industry feedback… If applied, this would mark a significant easing in regulatory guidelines, particularly for loans with rates that are markedly below the 7 per cent floor (noting that serviceability assessments for interest-only loans are required to be on the basis of a principal and interest loan covering the remainder of the loan terms once the interest-only period has expired),” the report stated.

However, some of the positive impact could be “offset” by other developments, the report noted.


These possible developments include ongoing changes to expense assessment processes, proposed changes to the capital treatment of residential loans, and additional capital requirements that APRA might impose on lenders struggling to effectively manage non-financial risks.

Westpac’s report also warns of the downside to the Coalition government’s proposed First Home Deposit Scheme, which would allow first home buyers (FHBs) earning up to $125,000 annually, or $200,000 for couples, and who have been able to save a deposit of at least 5 per cent, to use a government guarantee to borrow additional funds to meet the 20 per cent deposit requirement.

According to the report, while the scheme will likely boost FHB activity, the effect could be “muted” if they are treated as “high-risk” 90-plus per cent loan-to-value ratio loans.

Meanwhile, consumer sentiment towards house prices have taken a sharp upward turn in NSW and Tasmania, according to Westpac’s latest Housing Pulse, though it was more “muted” in other states and territories.

If the Reserve Bank of Australia (RBA) drops the official cash rate by 25 basis points in June, as many have predicted, Westpac believes consumer confidence towards housing could get “a shot in the arm”.

“Needless to say, next month’s sentiment results, due out June 12 and surveyed in a week that is expected to see the RBA’s first 25 basis point rate move, will be of intense interest,” the Westpac report states.

The major bank is now forecasting three rate cuts by the RBA this year – in June, August and November. This means the cash rate could fall to a new record-low 0.75 per cent by the end of 2019, if Westpac’s projection is correct.

[Related: More people could access mortgages under proposed APRA changes]

Serviceability changes could be ‘offset’ by expense process
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Tas Bindi

Tas Bindi


Tas Bindi is the features editor for The Adviser magazine. 


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