APRA announces fresh guidance on mortgage lending

APRA released for consultation a revised draft of Prudential Practice Guide APG 223 Residential Mortgage Lending in October 2016 to incorporate measures previously announced in 2014 or communicated to ADIs since that time.

“The revisions to APG 223 are designed to ensure that the sound lending practices that have been implemented across the industry since late 2014 are maintained and reinforced,” the regulator said in a statement.

As a result of the consultation, APRA has made a small number of refinements to the prudential practice guide, which are explained in a letter to ADIs released today. However, APRA stressed that it does not expect these refinements to result in material changes to existing lending practices across the industry as a whole.

In its letter to Australian banks APRA outlined a number of key areas including serviceability assessments, buffers and the assessment and verification of income, living expenses and other debt commitments, where changes have been made to APG 223.

During the consultation period, APRA noted that one respondent proposed alternative means of accounting for investment property costs in the serviceability assessment.

“APRA accepts that there are different methodologies to account for investment property costs,” the regulator said.

“Paragraph 43 has been revised to reflect the range of prudent practices that exist in this area and to indicate that the primary purpose of applying haircuts to expected rental income is to account for instability in that income due, for example, to the risk of non-occupancy.

“However, as rental income is typically less stable than expenses relating to investment properties, a prudent ADI would apply the haircut to gross rental income rather than net rental income.”

Another submission noted that banks may face operational impediments to applying haircuts of more than 20 per cent to expected rental income for certain properties with higher risks, but that other measures may be used to account for property-specific risks.

“Given investment lending represents a substantial portion of overall lending, APRA does not agree that operational impediments justify less robust practices in this area; however similar risk mitigation could potentially be achieved through other mechanisms,” the regulator said.

“APRA did not consider it necessary to amend its guidance in this area.”

However, the regulator has made changes to its lending guidance in relation to interest rate buffers.

One respondent highlighted that the use of an interest rate buffer in relation to home loans may affect the choice of lending product.

APRA noted that it has become aware that some banks may have had a practice of permitting changes to the loan type after settlement without conducting a serviceability assessment under the revised loan terms.

To address this, APRA has included additional guidance in APG 223 that a prudent lender would undertake a new serviceability assessment when making a material change to current or originally approved loan conditions (for example, changing between principal and interest and interest-only repayment terms).

“The revised APG 223 also sets out the expectation that a prudent ADI would not rely on longer-term access to ‘honeymoon’ or discounted introductory rates in assessing ongoing serviceability,” the regulator said.

APRA has released the revised final version of APG 223.

More to come.