BUSINESS & FINANCE
Justin Scattini, Ord Minnett Buderim.
APRA REMOVES INTEREST RATE FLOOR
T
he Australian Prudential Regulation Authority (APRA) has proposed removing the “at least” seven per cent interest rate floor it requires banks to use in their serviceability calculations, while retaining an interest rate buffer. Under the proposed changes, banks will be free to review and set their own floor, with guidance from the regulator. Banks are currently required to apply the higher of: 1) “an interest rate floor of at least seven per cent”; and 2) a buffer of two per cent above the borrower’s interest rate. APRA guidance is for the banks to use a floor and buffer comfortably above the prescribed levels, and market convention is for banks to use a 7.25 per cent floor and
2.25 per cent buffer. Under the proposed changes, APRA would remove the seven per cent floor, but retain a slightly higher interest rate buffer of 2.5 per cent. This will address the large differential that had opened up in recent years between mortgage rates and serviceability requirements. Given the current rates outlook, it appeared unlikely to narrow without its intervention. We expect these changes to be a modest positive for the sector – and build on improved sentiment following the Coalition Government’s re-election – although we would caution against becoming overly optimistic on their impact. Should APRA choose to adopt these changes, future cash rate moves would flow through to serviceability calculations on loans, to the extent the banks passed them on to borrowers. Under the current approach, the seven per cent floor blunted the impact of monetary policy on borrowers. Given the current low interest rates, we expect banks will be somewhat cautious about boosting borrowing capacity too aggressively. With the cash rate currently at 1.5 per cent – and expected to move lower – setting a very low buffer now may create problems when interest rates inevitably begin to rise (although we suggest this is some time off). The announced proposal should be
“We expect these changes to be a modest positive for the sector”
against becoming too optimistic on the benefit from these changes, given demandside factors and the fact that maximum borrowing capacity for Australian borrowers is already high compared with other markets. Nonetheless, combined with the re-election of the Coalition Government, the sector outlook does appear to have brightened somewhat.
viewed as: 1) a modest boost to potential housing credit growth; 2) a partial offset to ongoing credit tightening in other areas, such as household expense measure (HEM) reliance and a reduction in high debt-toincome lending; and 3) a levelling of the playing field somewhat between banks and non-banks. We would caution, however,
Justin Scattini is an Authorised Representative (no 427053) of Ord Minnett Ltd, AFS licence 237121. He can be contacted on 5430 4444. This article contains general financial advice only and does not consider your personal circumstances; you should determine its suitability to you. Before acquiring a financial product you should consider the relevant product disclosure statement. Past performance is not a reliable indicator of future performance.
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