The nation’s financial regulator has moved forward with its plans to scrap the 7 per cent floor for mortgage serviceability assessments.
The Australian Prudential Regulation Authority (APRA) will instead let deposit-taking institutions review and set their own minimum interest rate floor for serviceability assessments and utilise a revised interest rate buffer of at least 2.5 per cent over the loan’s interest rate.
APRA says the majority of submissions it received after a consultation process supported the idea of the proposals but some wanted further clarification and guidance on how they should set and apply their floor rates.
“In the prevailing environment, a serviceability floor of more than 7 per cent is higher than necessary for ADIs to maintain sound lending standards,” APRA chair Wayne Byers told The Adviser.
“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.”
“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,” Mr Byres said.
“Furthermore, they should regularly review these to ensure their approach to loan serviceability remains appropriate.”
It’s sound advice.
Mr Byres went on to say the changes are not intended to to signal any reduction in the importance that APRA puts on maintaining lending standards.