The announcement comes amid falling house prices, record-low credit growth, and expectations that the Reserve Bank will cut interest rates this year. The cash rate is currently at an all-time low of 1.5 per cent.
These proposed changes will mean increased flexibility and improved competition within the finance world, allowing authorised deposit-taking institutions (ADI) to set their own serviceability floors, while still maintaining a measure of prudence through the application of an appropriate buffer to reflect the inherent uncertainty in credit assessments.
Realmark Group Managing Director, John Percudani said, “Should the changes go ahead after 18 June, it will mean an increase in loan approvals for consumers with greater flexibility. Since 2014 the serviceability changes meant it was progressively difficult to get a mortgage, which is partly due to the serviceability assessment. For the WA market, it will be a huge win enabling home buyers to enter the market and will increase affordability for the right property.”
At present, APRA requires lenders to assess whether or not a consumer can afford their loan based on a rate that is inflated above current rates. This to ensure the consumer can still afford the loan repayments should interest rates rise. However, given the current market and record, low-interest rates with the forecasted to drop further APRA have recommended a plan to reduce the 7% floor on serviceability.
APRA will undertake a four-week consultation period, closing on 18 June 2019, before releasing updated guidelines for deposit-taking institutions.