In December 2014, APRA, the prudential regulator of Australia’s financial services industry, announced an increased level of supervisory focus on residential services. investment property mortgage loans.
This announcement was aimed at Authorized Depository Institutions (ADI) – companies authorized under the Banking Law of 1959, including banks, mortgage companies and credit unions – and was a response to a series of indicators: strong growth of investment real estate loans, high 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: “The ADIs with more aggressive practices should expect to find APRA increasingly just around the corner.”
On the positive side, APRA did not introduce blanket increases in capital requirements or caps on any particular types of loans, but instead focused its attention on a few key areas.
Riskier mortgage loans
Loans that are considered “higher risk” include high-income loan loans, high loan-to-valuation loans, interest-only owner-occupant loans, and very long-term loans. APRA warned the ADIs that increases in this type of lending could trigger further supervisory actions.
Investor Impact: ADIs are likely to make it difficult to get a loan without a decent deposit or limited cash flow.
Growth of investment real estate loans
APRA set a 10 percent portfolio growth benchmark for ADI loans for investment property loans; ADIs that exceed this threshold may attract increased scrutiny.
Investor impact: ADIs will likely try to slow the growth of their investor loan portfolio so that they do not exceed APRA’s benchmark. This could include removing discounts on investment property loans, so cheap credit may be harder to come by.
Serviceability Assessments
Serviceability means a borrower’s ability to make their loan payments. APRA said ADIs should include an interest rate cushion of at least 2% and a “floor” loan rate of at least 7% when assessing serviceability.
Investor Impact: If you’re considering an investment property loan, base your calculations on an interest rate of 9% (7% “minimum” plus 2% reserve) to obtain a safe loan amount. Many ADIs established these buffers when interest rates hit record lows for the first time.
Higher capital requirements
Additionally, on July 20, APRA announced an increase in the amount of capital that various ADIs will be required to set aside for certain Australian residential mortgage exposures. The change is effective July 1, 2016, and affects ADIs accredited to use the internal ratings-based (IRB) approach to credit risk.
Investor Impact: Affected ADIs may seek ways to offset the higher capital requirement, which may mean discount rates may be more difficult to find.
Different lenders are taking different approaches to complying with APRA guidelines, adding to the complexity of investment property mortgage loan approvals. If you’d like help navigating lender requirements or would like more information on how these changes could affect your personal situation, contact your mortgage broker today.