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Did APRA Just Hand The Big Banks A Lifeline?

APRA has released proposed amendments to guidance on mortgage lending. Here's what it means for Commonwealth Bank of Australia (ASX:CBA), NAB, ANZ and Westpac.

APRA has released a statement this morning with proposed amendments to guidance on mortgage lending. What does this mean for Commonwealth Bank of Australia (ASX: CBA) and others?

What’s the News?

APRA’s statement this morning indicates they are considering abolishing guidance that authorised deposit-taking institutions (ADIs) should assess borrowers’ ability to make repayments using a minimum interest rate of at least 7%.

If the changes were to go ahead, ADIs would “be permitted to review and set their own minimum interest rate floor for use in serviceability assessments”.

APRA Chair Wayne Byres said the environment for ADIs has changed since the guidance was first introduced and it may no longer be appropriate given conditions.

“APRA introduced this guidance as part of a suite of measures designed to reinforce sound residential lending standards at a time of heightened risk,” he said.

“Although many of those risk factors remain – high house prices, low interest rates, high household debt, and subdued income growth – two more recent developments have led us to review the appropriateness of the interest rate floor.”

The two recent developments cited are the record low interest rates and the increasing probability that they remain low, as well as the introduction of differential pricing between owner-occupier rates and interest-only rates.

At present, serviceability assessments incorporate an interest rate of at least 2% over the loan’s interest rate and a minimum rate of 7%.

As well as abolishing the 7% rate, APRA proposes to increase the 2% buffer to 2.5%.

What Does This Mean for the Banks?

The possible impact of these changes, if they go ahead, is that the maximum borrowing capacity could increase for most buyers. Additionally, it would be easier for a buyer to obtain a loan as they would be assessed at a rate lower than the rate used today.

For CBA, the largest mortgage lender in Australia, this news could have a big impact. It could also mean the other “big four” banks, like National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corporation (ASX: WBC), may be able to more readily compete with smaller banks which have recently reduced their interest rates.

This may be more good news for the banks following their big rise yesterday, but this news could also have negative implications on Australian household debt levels.

With lower hurdles to borrowing and the ability to borrow more, it is possible these changes could balloon what are already high household debt levels across the country.

A four-week consultation period will close on June 18th, with APRA expected to release a final version of the updated guidance shortly after that date.

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Disclosure: At the time of writing, Max does not own shares in any of the companies mentioned.

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