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Banks' Serviceability Guidelines Updated

APRA has finalised its proposed changes to the serviceability assessments performed on residential mortgage applications, effective immediately.

In a letter to ADIs issued today, the regulator confirmed it will no longer expect lenders to assess home loan applications using a minimum interest rate of at least 7%.

Instead, ADIs will be able to review and set their own minimum interest rate floor and utilise a revised interest rate buffer of at least 2.5% over the loan’s interest rate.

The majority of the 26 submissions received on the topic during the consultation phase supported APRA's proposal, although some respondents requested the regulator provide additional guidance on how floor rates should be set and applied.

Having considered the submissions, chair Wayne Byres said that APRA believes its amendments are appropriately calibrated.

“In the prevailing environment, a serviceability floor of more than 7% is higher than necessary for ADIs to maintain sound lending standards. Additionally, the widespread use of differential pricing for different types of loans has challenged the merit of a uniform interest rate floor across all mortgage products,” said Byres.

“However, with many risk factors remaining in place, such as high household debt, and subdued income growth, it is important that ADIs actively consider their portfolio mix and risk appetite in setting their own serviceability floors. Furthermore, they should regularly review these to ensure their approach to loan serviceability remains appropriate.”

APRA originally introduced the serviceability guidance in December 2014.

“The changes being finalised today are not intended to signal any lessening in the importance APRA places on the maintenance of sound lending standards. This updated guidance provides ADIs with greater flexibility to set their own serviceability floors, while maintaining a measure of prudence through the application of an appropriate buffer that reflects the inherent uncertainty in credit assessments," Byres said.

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