Banks and other mortgage providers will be administered further regulatory medicine if they continue to compromise on lending standards, warns the regulator.
Australia’s top banking regulator has signalled that it might impose more restrictions on home lenders to combat “heightened risk” in the residential property market.
Wayne Byers, the chairman of the Australian Prudential Regulation Authority (APRA), believes lenders are increasingly approving loans to borrowers who will potentially be unable to meet repayments.
Speaking at a business lunch in Sydney on Wednesday, Mr Byers highlighted APRA research showing that the percentage of housing loans approved outside of lenders’ normal serviceability policies had more than doubled since 2009.
According to the regulator, almost four per cent of all home loans approved in Australia this year involved lenders compromising on assessments of borrowers’ ability to repay.
Lenders were pushing through loans by assuming borrowers had “meagre living expenses” or by relying “on interest rates not rising very much”.
Earlier this year, APRA imposed caps on the ability of banks to increase lending to investment borrowers and flagged plans to increase the amount of reserve cash the major banks must put aside for every dollar they lend to home borrowers.
“Given many changes to lenders’ policies, practices and pricing are still relatively recent, it is too early to say whether further action might be needed to preserve the resilience of the banking system,” Mr Byers said.
“We remain open to taking additional steps if needed, but from my perspective the best outcome will be if lenders themselves maintain a healthy dose of common sense in their lending practices, and reduce the need for APRA to do more.”
If rates were to rise …
Mr Byers said the combination of high levels of household debt, rising property prices and subdued income growth, meant that lenders were operating in an environment of “heightened risks”.
He noted that these risks were currently manageable because borrowers were exposed to historically low interest rates.
But he warned that more borrowers would find it difficult to service their debts if interest rates reverted to historic averages.
At present interest repayments account for less than nine per cent of household income, but this would blow out to 12 per cent if mortgage rates reverted to the long-term average of around seven per cent.
“Interest payments account for a lower share of household income than at any time since the financial crisis,” he said.
“Over a longer period, however, they do not necessarily look especially low.
Read the rest of the article by George Lekakis at The New Daily here.