The Australian Prudential Regulation Authority are tightening the screws again on lenders by strengthening the scrutiny of loan serviceability.
The banking regulator has 'refined' the criteria used to assess the capability of borrowers to pay back loans by changing the way it calculates loans and assesses rental interest deductions.
In a memo to mortgage brokers, Westpac said, "APRA has refined its serviceability requirements for exisiting internal and external mortgage liabilities. It's requirements will ensure that a loan serviceability is assessed using a prudent approach and robust lending standards".
The screw tightening is part of on an ongoing effort from APRA to check lenders' property exposure and to strengthen the banking system.
The RBA and the Federal Government are concerned about borrowers who take on too much debt, especially in hot housing market areas, and whose circumstances might change leaving them financially vulnerable.
The Australian Securities and Investments Commission has also made moves to increase monitoring of borrower applications after coming to the conclusion loans were being approved without enough rigorous analysis.
Westpac's changes mean they will now base serviceability on a 20-year term and tighten the rules for assessing the rental interest tax deduction.
In further moves to come next month, Westpac will also provide seperate estimates of applicants' exposure to interest-only loans and will change the way rental interest tax deductions are calculated.
