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Brokers could soon need to provide banks with more details on borrower’s incomes, expenses, requirements and objectives, if proposed changes to APRA’s revised residential mortgage lending guide are approved.
Earlier this week, the Australian Prudential Regulation Authority (APRA) released for consultation (until December 19) a revised Prudential Practice Guide: Residential mortgage lending (APG 223).
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The regulator is now proposing changes to its guide on residential mortgage lending so that there is “more detailed guidance” on areas such as: quantitative serviceability parameters, including the application of interest rate buffers and floors; haircuts for non-salary income such as rental income; treatment of interest-only loans and estimation of living expenses; compliance with responsible lending requirements; monitoring of serviceability policy overrides; and the treatment of self-managed superannuation fund loans and other specific loan types.
For example, a new section of the guide suggests banks could be exposed to “potentially significant risks” if they fail to “make reasonable inquiries about the borrower’s requirements and objectives”.
Further, APRA has updated its section on serviceability assessments, highlighting that ADIs use serviceability tests to determine “whether the borrower can afford the ongoing servicing and repayment costs of the loan for which they have applied”.
It adds that it expects ADIs to "fully apply interest rate buffers and floor rates to both a borrower’s new and existing debt commitments".
The guide reads: "APRA’s expectation is that the combination of buffers and other adjustments in these models would seek to ensure that the portfolio in aggregate, would be able to absorb substantial stress, such as in an economic downturn or rising interest rate environment, without producing unexpectedly high loan default losses for the lender...
"APRA expects that ADI serviceability policies should incorporate an interest rate buffer of at least two percentage points. A prudent ADI would use a buffer comfortably above this... Prudent serviceability policies should incorporate a minimum floor assessment interest rate of at least seven per cent. Again, a prudent ADI would implement a minimum floor rate comfortably above this."
Interest-only loans
Following on from ASIC’s report that suggested brokers should record “concise summaries of consumers’ requirements and objectives” for having interest-only loans, APRA’s updated guide says it expects ADIs to “assess the ability of the borrower to meet future repayments on a principal and interest basis for the specific term over which the principal and interest repayments apply, excluding the interest-only period”.
It adds that although borrowers may have “legitimate reasons” to prefer interest-only loans in some circumstances (such as repayment flexibility), these loans carry higher credit risk in most cases, and may not be appropriate for all borrowers.
The updated guide reads: “APRA expects that an ADI would only approve interest-only loans for owner-occupiers where there is a sound and documented economic basis for such an arrangement and not based on inability of a borrower to service a loan on a principal and interest basis.”
It also states that it expects interest-only periods offered on residential mortgage loans “to be of limited duration, particularly for owner-occupiers”, and that “prudent serviceability assessment[s] would incorporate the borrower’s ability to repay principal and interest over the actual repayment period”.
Although the guide is not expected to require material change to ADIs’ existing lending practices, the changes could result in brokers having to submit more information to banks when servicing home loans.
‘Making it harder to brokers to qualify loans’
Speaking to The Adviser, Tim Brown, CEO of Vow Financial said that if the amended guide is implemented, it could result in a headache for brokers.
Mr Brown said: “File notes are already an important part of the broker process and those broker notes are often shared with the lender, so brokers will just have to have more detailed notes around why customers selected interest-only over principal and interest, and so forth.
“It's going to make it harder for brokers to qualify loans, and it’s already difficult now. I was talking to a broker the other night and he said 12 months ago he had a 30 per cent conversion rate on leads, but now it’s 18 per cent because of all the new credit requirements around increased capacity and borrowing costs.
“In APRA's eyes, that's probably a good thing, but in the broker's eyes, they're not too excited about it, but they're living with it.”
Mr Brown added that he felt that APRA’s suggestion that the interest-only period offered of residential home loans should be for a “limited duration” was inappropriate.
The Vow Financial CEO said: “From my perspective, as a consumer, I use my home loan as an offset account and put all my cash in there so I can offset the interest on my loan. I operate on an interest only so I can apply more to principal or less depending on my bills in my month.
“I wouldn't want government dictating to me how to manage my cash flow, or saying that I have to start paying principal interest after five years when I’m already paying down my debt using the offset.
“Unfortunately, with any policy change made at a government level it’s not negotiable, and therefore you don’t have a right to make any decision other than adapt.”
[Related: The Word: Banks and lending criteria]
