The Australian Prudential Regulation Authority (APRA) has announced plans to phase out the 10 per cent benchmark on investor loan growth, a temporary measure introduced in 2014. This move signals a shift towards embedding more permanent measures to ensure robust lending standards across the banking sector, while other macroprudential settings remain unchanged.
Key Takeaways
- APRA is moving away from the temporary 10% investor loan growth benchmark.
- Banks must provide assurances on strengthened lending standards to have the benchmark removed.
- Other macroprudential settings, like the mortgage serviceability buffer, will remain steady.
- APRA will continue to monitor risks, particularly high household debt and potential for risky lending.
Transitioning from a Temporary Benchmark
The 10 per cent benchmark on investor loan growth was initially implemented to curb higher-risk lending and improve practices. APRA has observed significant improvements in lending quality, standards, and capital resilience by authorised deposit-taking institutions (ADIs) in recent years. Consequently, APRA is prepared to remove this benchmark for ADIs that can demonstrate strong lending standards.
To have the benchmark no longer apply, ADI Boards will need to provide assurances that:
- Investor lending growth has been below the 10 per cent benchmark for at least the past six months.
- Lending policies align with APRA’s guidance on serviceability.
- Lending practices will be strengthened where necessary.
APRA Chairman Wayne Byres emphasised that while the benchmark has served its purpose, the environment remains one of heightened risk. He stressed the importance of ADIs maintaining a firm grip on the prudence of both their policies and practices, particularly in assessing borrower expenses and existing debt commitments.
Embedding Stronger Lending Practices
Beyond the removal of the growth benchmark, APRA expects ADIs to establish internal portfolio limits on the proportion of new lending at very high debt-to-income (DTI) levels. Additionally, policy limits on maximum DTI levels for individual borrowers will be implemented. These measures are intended to complement the detailed serviceability calculations and provide a backstop, considering an applicant’s total borrowings.
Stable Macroprudential Settings
In a separate announcement, APRA confirmed that its broader macroprudential policy settings will remain unchanged following a review of domestic and international financial conditions. The mortgage serviceability buffer will stay at 3 percentage points, and the countercyclical capital buffer will remain at its default level of 1 per cent of risk-weighted assets.
APRA Chair John Lonsdale noted that while credit continues to flow and lending standards are sound, the authority is closely monitoring potential risks. These include the impact of falling interest rates on credit growth, leverage, house prices, and the potential for a recurrence of riskier lending practices, such as high DTI and investor lending. APRA is preparing to engage with regulated entities on the implementation of various macroprudential tools, including limits on high DTI lending, investor loans, and interest-only loans, should they be needed to address financial stability risks.