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Banks that offer mortgages with LVRs above 90 per cent are taking serious risks, according to APRA.
The regulator used its final prudential practice guide on residential mortgage lending to warn lenders to monitor exposures by LVR bands.
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"Significant increases in high-LVR lending would typically be a trigger for senior management to review risk targets and internal controls over high-LVR lending, with board oversight," said the guide, which was released earlier this week.
"APRA has not formally defined 'high-LVR lending', but experience shows that LVRs above 90 per cent – including capitalised LMI premium or other fees – clearly expose [a lender] to a higher risk of loss."
Residential mortgage lending constitutes the largest credit exposure in the Australian banking system and constitutes over half of many lenders' total credit exposure, according to APRA.
"Although mortgage lending risk cannot be fully mitigated through conservative LVRs, prudent LVR limits help to minimise the risk that the property serving as collateral will be insufficient to cover any repayment shortfall," it said.
APRA emphasised that although LVR limits are an important element part of managing risk in loan origination, they should not be the only tool used by lenders.
The regulator said another way to minimise risk is for lenders to have local knowledge of things like house prices, stock levels and market competition.
"In APRA's experience, [lenders] that extend loans away from their core geographic market tend to be more reliant on third-party originators," it said.
"If not closely monitored, this reliance can potentially lead to additional risk and give rise to higher levels of exposure that may be outside [a lender's] risk appetite."
[Related: APRA warns industry about commissions 'risk']
