In a letter to authorised deposit-taking institutions (ADIs)- a bank or credit union- APRA is removing the guideline of using a minimum interest rate of at least 7 per cent.
Currently, if an investor is unable to pay back the loan at a mortgage rate of 7 per cent, they are not approved for the loan.
Under this new proposal, ADIs would be permitted to review and set their own minimum interest rate floor for use in serviceability assessments.
APRA Chair Wayne Bryes believes it the changes will provide greater flexibility to set their own serviceability floors.
“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,” said Mr Byres.
“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,” he said.
In its letter, ARPA has proposed a buffer of 2.5 per cent to ADIs meaning an investor would have 10 25 basis point rate rises before finding themselves in financial distress.
The guidelines are not new, with APRA first introducing them back in 2014 as part of its efforts to reinforce sound residential lending standards.
APRA is having a four-week consultation program that will finish on 18 June, ahead of APRA releasing its final version of the updated APG 223 shortly afterwards.
Cameron Micallef is a journalist at Nest Egg, writing primarily about personal wealth and economic markets.
Prior to this, Cameron worked for Australian Associated Press. He graduated from the University of Wollongong with a double degree in communications and commerce.