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.
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, high Australian household debt, accelerating credit growth and historically low interest rates.
APRA reiterated the seriousness of its intentions in May of this year, with chairman Wayne Byres saying that: “ADIs with more aggressive practices should fully expect to find APRA increasingly at their doorstep.”
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.
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 growth 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 assessments
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% and a “floor” lending rate of at least 7% when assessing serviceability.
Investor Impact: If you’re thinking about taking out an investment loan, base your calculations on a 9% interest rate (7% “floor” plus 2% buffer) for a safe amount to borrow. Many ADIs put such buffers in place when interest rates first reached historic lows.
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. 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.
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 your broker today.