ASIC’s RG 209 – This is an update on reasonable lending legislation across a lot of issues (Living expenses verification included).
There was 72 submissions and public hearings have finished.
We expected a response/update by the end of 2019.
With APRA’s release of the updated APG 223, credit providers have responded quickly to changes in the mortgage assessment guidelines as below.
In terms of application, the higher of the floor rate or the actual rate plus buffer is the one that is applied to the loan assessment.
For example, if the actual interest rate is 3.50%, applying the sensitivity margin would deliver an assessment rate of 6.00% (3.50% + 2.50%) which would apply as it is higher than the floor rate.
These changes flowed through more quickly that we originally expected. With the outcome being the “higher of” the Floor Rate or the Actual Rate plus buffer, this falls in line with APRA’s objectives.
|Financier||Sensitivity Margin||Floor Rate||Application|
|ANZ Bank||2.50%||5.50%||Higher Rate|
|Bank of Melbourne||2.50%||5.75%||Higher Rate|
|Macquarie Bank||2.50%||5.30%||Higher Rate|
The largest beneficiary of the changes will holders of Principal & Interest (“P&I”) Home Loans. These typically have the lowest actual rate. At the other end of the scale, interest only investment loans are unlikely to see any material change.
ASIC will hold public hearings (this month) as part of the wider public consultation on its guidance on the responsible lending obligations. Specifically it draws back to Regulatory Guide 209 which was first issued in November 2014.
This deals with a range of issues, including whether small business lending should be included in the law. One of the other opportunities is clarification of how Living Expenses should be assessed when applying for consumer credit.
Some leadership on this topic alone will be gratefully received and has the potential to save all stakeholders in the credit process considerable time.
All indications are that the banks will respond quickly to the changes. In fact, Westpac and others were reading to go except APRA cautioned them not to do so.
We expect as a result that these changes will flow through more quickly that we originally expected.
For mortgage holders, changes to your borrowing capacity are likely in 2019. With the low interest environment now a firm part of the financial landscape, there has been pressure to adjust mortgage lending criteria.
For background, The Australian Prudential Regulation Authority (“APRA”) is a Government authority to supervise the financial system. In 2017, they introduced Prudential Practice Guide APG 223 Residential Mortgage Lending. It included the need for a single floor assessment interest rate for ADI’s to follow when assessing mortgages.
A single rate of 7.25% has been the most common rate for assessing mortgage repayment capacity over recent years.
It is now proposing changes to this serviceability benchmark. APRA chair Wayne Byres stated,“With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7 per cent floor and actual rates paid has become quite wide in some cases – possibly unnecessarily so.”
A proposal is to reinstate a “buffer rate” of say 2.50%. In our view this makes sense, with interest rates on mortgages now being more diverse (based on factors such as repayment type and loan purpose).
A single rate is therefore no longer representative of risk.
A reminder that this is not finalised, though we have prepared below a small insight into how a change could impact borrowing capacity.
As an example, if you have a current borrowing capacity of say $700,000 – a 1% change to the assessment rate (to 6.25%) would yield an additional $75,000 in borrowing capacity.
We have had a number of stakeholders contact us to see when and if changes will flow through.
APRA is conducting a four-week consultation that will close on 18 June. They will then release a final version of the updated APG 223 shortly afterwards.
It will then be up to the banks to jostle around with their modelling to see where it will all land.
For more information contact:
E – firstname.lastname@example.org
P – (03) 9620 2001