What do the APRA announcements mean for your property portfolio?
In December 2014, APRA, the prudential regulator of the Australian financial services industry, announced an increase in the level of supervisory focus on residential mortgage lending.1
This announcement was directed at Authorised Deposit-taking Institutions (ADIs) – corporations authorised under the Banking Act 1959 including banks, building societies and credit unions – and was a response to a number of indicators: strong growth in investment property loans,2 high Australian household debt, accelerating credit growth and historically low interest rates.
APRA reiterated the seriousness of its intentions in May of this year,3 with chairman Wayne Byres saying that: “ADIs with more aggressive practices should fully expect to find APRA increasingly at their doorstep.” 4
On the upside, APRA did not introduce across-the-board increases in capital requirements or caps on any particular types of loans, but focused its attention on a few key areas.5
Higher-risk mortgage lending
Lending that is considered “higher risk” includes high loan-to-income loans, high loan-to-valuation loans, interest-only loans to owner-occupiers, and loans with very long terms. APRA warned ADIs that increases in this type of lending could trigger further supervisory action.
Investor Impact: ADIs are likely to make it harder to get a loan without a decent deposit or with limited cash flow.
Investor loan growth
APRA set a benchmark of 10 per cent portfolio growth for lending by ADIs to property investors – ADIs exceeding this threshold may attract further scrutiny.
Investor Impact: ADIs will probably try to slow their investor loan portfolio so that they don’t exceed APRA’s benchmark. This could include removing discounts on investor loans, so cheap credit may be harder to come by.
Serviceability means a borrower’s ability to make their loan repayments. APRA said that ADIs should include an interest rate buffer of at least 2% above the loan product rate with a “floor” lending rate of at least 7% when assessing serviceability, whichever is higher.5
Investor Impact: ADIs are likely to apply the suggested (or higher) interest rate buffer and floor when assessing serviceability. Borrowers will need to factor this in when working out how much they can afford to borrow.6
Increased capital requirements
Additionally on 20 July, APRA announced an increase in the amount of capital that a number of ADIs will have to set aside for certain Australian residential mortgages exposures.7 The change comes into effect on 1 July 2016 and impacts those ADIs accredited to use the internal ratings based (IRB) approach to credit risk.8
Investor impact: Affected ADIs may look for ways to offset the increased capital requirement which may mean that discount rates may be harder to find.
Different lenders are taking different approaches to meeting the APRA guidelines, increasing the complexity of investment home loan approvals.
If you would like help in navigating lender requirements or would like to know more about how these changes could affect your personal situation, get in touch with me today.
1 APRA Media Release – APRA announces further steps to reinforce sound residential mortgage lending practices
2 ABC News – Home lending rebounds to a new record, driven by investors
3 APRA PDF – Draft Prudential Practice Guide
4 ABC News – Investor home loans tighten as regulator APRA clamps down
5 APRA Media Release: APRA outlines further steps to reinforce sound residential mortgage lending practices
6 Financial Review – Low rates lead banks to increase home loan “buffers”
7 APRA Media Release – APRA increases capital adequacy requirements for residential mortgage exposures under the internal ratings-based approach
8 Sydney Morning Herald – APRA lifts mortgage capital on big banks by billions of dollars