The member-owned bank has announced a second cut to its interest rate floor for mortgage serviceability assessments.
Heritage Bank has lowered its interest rate floor for home loan serviceability assessments from 5.75 per cent to 5.20 per cent.
The changes are effective for mortgage applications submitted from 15 October.
In early July, the prudential regulator scrapped its requirement for a 7 per cent interest rate floor and raised its recommended buffer rate from a minimum of 2 per cent to 2.5 per cent.
APRA chair Wayne Byres said that the regulator’s amendments were “appropriately calibrated”, stating that a serviceability floor of more than 7 per cent was “higher than necessary for ADIs to maintain sound lending standards”.
These latest serviceability changes come amid debate concerning the impact of lower floor rates on overall credit demand.
The Council of Financial Regulators (CFR) – which consists of the Reserve Bank of Australia (RBA), the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC) and Treasury – recently downplayed the stimulatory impact of floor rate cuts to mortgage serviceability assessments.
The CFR’s sentiment is shared by CEO of the Commonwealth Bank of Australia (CBA) Matt Comyn, who previously said that the changes would have a “minimal effect” on credit growth, claiming that “almost 90 per cent of borrowers don’t borrow at the maximum”.
However, CEO of the Australian Finance Group (AFG) David Bailey told The Adviser’s sister publication Mortgage Business that the floor rate cuts had removed barriers to credit for borrowers that were lured into the market following the RBA’s interest rate cuts.
Mr Bailey said the floor rate cuts enabled the broking group’s network of loan writers to facilitate access to credit for borrowers that had previously been turned away by serviceability restrictions.
“Our brokers are reporting that when there was a change in interest rates, it drove a higher level of enquiry but there were some customers who still didn't service under the old benchmark,” he said.
“I think it's had a role to play because those customers who initially enquired have now been activated.”
This was reflected in AFG’s financial results for the first quarter of FY2020 (1Q20), in which the group’s broker network lodged $15.7 billion in home loans, up 11 per cent on the same quarter in 2018.
The improvement in home lending activity is also reflected in the Australian Bureau of Statistics’ (ABS) latest Lending to Households and Businesses data, which has reported a 2.9 per cent rise (seasonally adjusted) in the value of home loans settled in August.
The uptick in August followed a 5.1 per cent rise in July — the largest monthly increase since March 2015.
[Related: Major bank drops serviceability floor rate]