Rule Changes to Ease Rising Household Debt

The Australian Prudential Regulation Authority (APRA) has increased the serviceability buffer in response to concerns around rising household debt levels throughout the nation; advising authorised lenders that when assessing a new borrower’s ability to service their loan payments to work on an interest rate at least 3% higher than the current product loan rate. The previous buffer in place was 2.5%.

APRA Chair Wayne Byres said that whilst they have strong faith in the lending standards overall, and the banking system is well capitalised, “increases in the share of heavily indebted borrowers, and leverage in the household sector, mean that medium-term risks to financial stability are building.”

With one in five new loans approved in the June 2021 quarter more than six times that of a typical borrower’s income, Mr Byres said that regulators expected housing credit growth to outpace income growth in the coming months, saying that these circumstances made the modification to the serviceability buffer the most appropriate intervention mechanism.

“With the economy expected to bounce back as lockdowns begin to be lifted around the country, the balance of risks is such that stronger serviceability standards are warranted.”

“In taking action, APRA is focused on ensuring the financial system remains safe, and that banks are lending to borrowers who can afford the level of debt they are taking on – both today and into the future.”

This move is fully supported by the Council of Financial Regulators as well as the Australian Competition and Consumer Commission.