Australia's financial regulators have launched a joint attack on risky home lending as investment and interest-only loans may threaten the stability of Australia’s financial system.
The Australian Prudential Regulation Authority (APRA) has written to authorised deposit-taking institutions (ADIs) outlining plans to crackdown on mortgage lending practices. The regulator warned that it will raise capital levels for any banks that do not maintain a prudent approach to residential lending.
“This is a measured and targeted response to emerging pressures in the housing market,” said APRA Chairman Wayne Byres.
“These steps represent a dialling up in the intensity of APRA’s supervision, proportionate to the current level of risk and targeted at specific higher risk lending practices in individual ADIs.”
There is currently very strong growth in lending to property investors, as highlighted by the Reserve Bank in its most recent Financial Stability Review (FSR), leading to imbalances in the housing market. The banking regulator had previously announced it was considering action to stop the housing market from overheating.
APRA’s letter to ADIs stipulates that the growth in loans to property investors should not exceed 10%, and that banks should use a 2% interest rate buffer and a "floor" lending rate of 7% when assessing borrowers' ability for repayment.
The crackdown is expected to help guard against any relaxation of lending standards, and to further reinforce sound residential mortgage lending practices in the context of historically low interest rates, high levels of household debt, strong competition in the housing market and accelerating housing credit growth.
The financial regulator will commence its review in the first quarter of 2015. Should an ADI fall short of APRA’s expectations, it may be subject to increased reporting obligations, additional on-site reviews, mandated reviews by external parties, and/or higher capital requirements.
As part of the broader review, the Australian Securities and Investments Commission (ASIC) also announced it will be conducting surveillance into the provision of interest-only loans, to ensure that such loans are not being given to those who will struggle to afford repayments when the interest-only period ends.
Interest-only loans as a percentage of new housing loan approvals by banks reached a new high of 42.5% in the September 2014 quarter (this includes owner-occupied and housing investment loans).
The probe will look at the conduct of banks, including the big four, and non-bank lenders and how they are complying with important consumer protection laws, including their responsible lending obligations.
“While house prices have been experiencing growth in many parts of Australia, it remains critical that lenders are not putting consumers into unsuitable loans that could see them end up with unsustainable levels of debt,” said ASIC Deputy Chairman Peter Kell.
“Compliance with responsible lending laws is a key focus for ASIC. If our review identifies lenders’ conduct has fallen short, we will take appropriate enforcement action."
APRA and ASIC are members of the Council of Financial Regulators along with the Reserve Bank of Australia and Treasury, which have been working together to monitor, assess and respond to risks in the housing market.