The Australian Prudential Regulation Authority (APRA) has announced additional supervisory measures aimed at moderating the growth of investor lending in particular. APRA has written to all banks and other approved deposit taking institutions (ADIs) setting out its expectations for mortgage lending going forward which in summary includes:
- limit new interest-only lending to 30% of total new residential mortgage lending with strict limits where the loan to valuation ratio (LVR) is above 80%
- manage lending to investors to comfortably remain below the previously advised benchmark of 10% growth
- ensuring that loan serviceability metrics (including interest rate and net income buffers) are set at appropriate levels for current conditions
- a continued restraint on lending growth in higher risk segments (e.g. high loan-to-income loans, high LVR loans, and loans for very long terms).
APRA has indicated that it is likely to impose additional requirements on an ADI if the proportion of new lending on interest-only terms exceeds 30% of total new mortgage lending. In the case where an ADI operates above the 10% growth benchmark for investor lending, APRA has indicated that such a breach will prompt an immediate review of the adequacy of the ADI’s capital requirements.
The latest APRA review and focus is undoubtedly aimed at curbing bank and ADI lending for investment purposes. What we can expect to see is a further tightening in the supply of new lending in these sectors from traditional bank and ADI lenders. This may come in the form of imposing additional requirements on borrowers or refusing to lend outright due to its (the bank’s) internal constraints.
This of course doesn’t necessarily mean that loans being “rejected” by banks and ADIs are necessarily inferior. Rather, the current operating environment (i.e. regulatory environment) of traditional lenders such as banks makes potentially less economically viable, particularly if (for example) a bank’s capital requirements are increased.