The Australian Prudential Regulation Authority (APRA) has announced it will go ahead with changes to the interest rate mortgage buffer.

APRA’s Adjusts The Mortgage Interest Rate Buffer

APRA confirmed its guidance on residential mortgage lending will no longer expect them to assess home loan applications using a minimum interest rate of at least 7%. Common industry practice has been to use a rate of 7.25%.

The new rules will be that banks can review and use their own minimum interest rate floor for serviceability assessments and use a revised interest rate buffer of at least 2.5% above the loan’s actual interest rate.

APRA Chairman Wayne Byres said: “In the prevailing environment, a serviceability floor of more than seven per cent is higher than necessary for ADIs to maintain sound lending standards.

“Additionally, the widespread use of differential pricing for different types of loans has challenged the merit of a uniform interest rate floor across all mortgage products.

The changes being finalised today are not intended to signal any lessening in the importance APRA places on the maintenance of sound lending standards.”

The new guidance takes effect immediately.

What Could The Effects Be?

Well, it has already sent the share prices of most of the big four ASX banks higher.

The share price of National Australia Bank Ltd (ASX: NAB) is up 0.1%, the share price of Westpac Banking Corp (ASX: WBC) is up 0.3%, the share price of Australia and New Zealand Banking Group (ASX: ANZ) is flat and the share price of Commonwealth Bank of Australia (ASX: CBA) is up by 0.65%.

It certainly makes it easier for people easier to get a (larger) loan. It could add tens of thousands of dollars onto their potential maximum borrowing limit. This could provide a boost for the struggling housing market, although this alone won’t be the solution for mortgage arrears.

It does make sense to reduce the interest rate buffer. It could be a very long time before most Australia see the RBA interest rate back at 3% or higher. However, it certainly could elevate house prices a little, which may be good for the overall economy but probably not for first home buyers.

Aside from the interest rate serviceability, I hope banks retain the level of mortgage application examination that has been conducted this year – it’s not a good idea to over-lend to people.

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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).

At the time of publishing, Jaz does not have a financial interest in any of the companies mentioned.