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In 2019, the prudential regulator adjusted the capital requirements for loans the banks originated under the government’s First Home Loan Deposit Scheme (FHLDS).
The same treatment has now been extended to loans under the broader Home Guarantee Scheme, which the former Morrison government expanded in March.
The scheme allows eligible first home buyers (and now regional buyers under the new extension) to buy a property with a deposit as small as 5 per cent, while the government guarantees 15 per cent of the property price. Eligible single parents can have a deposit as small as 2 per cent, while the government will guarantee up to 18 per cent.
APRA has reported on how banks should treat loans issued under the programs in newly published answers to frequently asked questions.
Under the standardised approach to credit risk, APRA noted banks will be able to treat loans subject to the scheme in a comparable manner to residential mortgage loans with a loan-to-valuation ratio (LVR) of 80 per cent and accordingly risk-weighted at 35 per cent.
The risk weight has to be applied to the total amount lent to the borrower, reflecting the government guarantee and terms of the program.
Banks that use the standardised approach may report Home Guarantee Scheme mortgages as having an 80 per cent LVR for capital purposes, under Reporting Standard ARS 112.1 Standardised Credit Risk – On Balance.
However, banks will need to act differently for their own internal risk management, including the measurement of risk appetite.
APRA has said it expects that authorised deposit-taking institutions (ADIs) will monitor LVRs of mortgages under the Home Guarantee Scheme, based on the borrower’s actual equity contribution.
Further, for all other regulatory reporting, the banks will also need to report the LVR of the mortgages according to the borrower’s actual equity contribution – this includes Reporting Standard ARS 223 Residential Mortgage Lending.
The treatment will also apply to the new Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk, which comes into effect from next year.
But once the government guarantee ceases to apply, banks need to revert to calculating the regulatory capital requirements in line with existing rules under the Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk.
For banks that use the internal ratings-based approach to credit risk, there are no adjustments to the capital treatment of loans subject to the Home Guarantee Scheme.
Last week, APRA also told the banks that they will need to include buy now, pay later and higher education debts when reporting debt-to-income ratios from September.
The financial regulators have signalled that they are monitoring the housing market closely, watching for any cracks as interest rates have started to rise.
[Related: Financial regulators on watch for cracks in mortgage market]
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