The Australian Prudential Regulation Authority (APRA) has flagged lowering the minimum interest rate serviceability buffer from 7% to a level determined by banks and other financial institutions; essentially removing the cap and allowing more Australians to take out mortgages and larger loans.
The removal of the interest rate floor comes amid falling house prices, record-low credit growth, and expectations that the Reserve Bank will cut interest rates this year; as early as next week.
Leading up to this, APRA has required banks to test prospective borrowers against the higher of either an interest rate of 7%, or a 2% ‘buffer’ over the loan’s actual interest rate, to ensure repayments could still be met in the event of a rate rise.
APRA chairman Wayne Byres said that with interest rates at record lows and likely to remain at historically low levels for some time, the gap between the 7% floor and actual rates paid has become quite wide in some cases.
Whilst the proposed changes are likely to increase the maximum borrowing capacity for a given borrower, there is still a responsibility of banks and lending institutions to maintain sound, responsible lending standards.
The four-week consultation period closes on June 18; APRA will then release its final version of its update guidance the banks will need to follow. For many borrowers, this should be positive news; allowing some to finally be able to enter the market for the first time, and others to increase the amount they are borrowing when in the market to buy.
Good news for buyers and sellers. We will keep you updated on the final outcome.