Absolute biggest news for finance in three years

Detailed in a letter sent out to lenders and other authorised deposit-taking institutions (ADIs), APRA announced that it is looking to stop advising ADIs to assess if borrowers can make repayments on loans using a minimum interest rate of 7 per cent. Instead, it is looking to allow ADIs to make their own minimum interest rate.

Additionally, APRA also proposed that the serviceability assessments by ADIs use an interest rate buffer of 2.5 per cent.

APRA introduced this guidance as part of a suite of measures designed to reinforce sound residential lending standards at a time of heightened risk. Although many of those risk factors remain – high house prices, low interest rates, high household debt and subdued income growth – two more recent developments have led us to review the appropriateness of the interest rate floor.

With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7 per cent floor and actual rates paid has become quite wide in some cases – possibly unnecessarily so.

In addition, the introduction of differential pricing in recent years – with a substantial gap emerging between interest rates for owner-occupiers with principal-and-interest loans on the one hand and investors with interest-only loans on the other – has meant that the merits of a single floor rate across all products have been substantially reduced.

The proposed changes will provide ADIs with greater flexibility to set their own serviceability floors while still maintaining a measure of prudence through the application of an appropriate buffer to reflect the inherent uncertainty in credit assessments.

What does this mean for investors?

Speaking with Smart Property Investrment, Sze Chuah, director of MLS Finance, called the announcement “the absolute biggest news for finance in three years”.

“That’s the thing that’s been killing borrowers, and killing borrowers’ serviceability over the last few years, that despite the rates being as low as mid 3s onwards, the assessment rate is as much as 4 per cent higher,” Mr Chuah said.

“I wouldn’t imagine any lenders would have any issues with that because, again, it’s going to allow them to lend out more than what is possible under the current regime. It’s going to be massive.”

He claimed that property investors would, in most cases, be able to borrow more under the new changes.

What does this mean for property?

The proposed APRA changes seem sensible given the interest rate environment with the expectation that rates will fall from here and remain lower for longer. Furthermore, since 2014 it has become much more difficult to get a mortgage, which is partly because of this serviceability assessment.

These proposed changes, in conjunction with the uncertainty of the election now behind, will potentially provide additional positives for the housing market. Furthermore, these changes may also ease some of the urgency for official interest rate cuts by the Reserve Bank. If housing can provide some additional economic stimulus, rate cuts may be less necessary. Should these changes be implemented, it would potentially slow the declines further and may result in an earlier bottoming of the housing market. We currently expect the market to bottom in mid-2020.

A stable and well-regulated financial system is fundamental to our economic prosperity and it is appropriate that the guidelines for lending standards are regularly reviewed.

As APRA notes, this is not about easing sound lending standards but recognition that the interest rate environment has changed with interest rates now at a record lows, and likely to remain so, the gap between the 7 per cent floor and actual rates has become quite wide.

Source - Smart Property Investment