Australian regulator to ease mortgage rules in reprieve for banks

[SYDNEY] Australia's prudential regulator proposed loosening the criteria banks are required to use to assess people's ability to service home loans, sending shares in the sector higher on expectations the easing would boost borrowing.

The change would remove a minimum 7 per cent interest rate banks currently assume when considering loan applications and instead allow them to set their own minimum assumptions for assessing loan serviceability.

The proposed easing of the borrowing limit, first introduced in 2014, comes amid a sustained drop in house prices, record-low credit growth, a slowing economy and expectations the central bank would this year cut its benchmark interest rate from an all-time low of 1.5 per cent.

"With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7 per cent floor and actual rates paid has become quite wide in some cases - possibly unnecessarily so," APRA Chair Wayne Byres said in a statement.

Instead of the 7 per cent floor, the regulator is proposing banks be allowed to set their own minimum interest rate floor in their serviceability assessments. It added banks should use a minimum 2.5 per cent buffer on top of their loan rates in these assessments, a half a per cent hike to the existing buffer.

Bank shares surged in early trade on Tuesday, defying a selloff in the broader market and adding to the previous day's rally when a surprise conservative election win removed concerns about drastic regulatory changes.

Shares of the country's biggest lender, Commonwealth Bank of Australia, jumped 3 per cent before giving up the gains to be trading flat. Shares of No. 2 lender Westpac Banking Corp were up 1.5 per cent, while the third largest, Australia and New Zealand Banking Group, jumped as much as 5 per cent at the open before settling up 1 per cent. The benchmark index was 0.2 per cent lower.

The announcement should "provide a sentiment boost to the market, by signaling that the housing regulatory environment has passed its maximum point of tightening," Goldman Sachs analysts told clients in a note.

The regulator has begun a consultation period for the proposed change that closes on June 18.

Australia's average mortgage rate is 4.25 per cent, according to the Reserve Bank of Australia. But the current serviceability floor means banks only approve new loans if borrowers can repay "comfortably above" the regulator's 7 per cent minimum. Banks have typically interpreted this to be around 7.25 per cent.

Relaxing that rule to only a 2.5 per cent buffer above the average loan rate would mean borrowers are assessed on their ability to repay loans at a 6.75 per cent rate - a half percentage point reduction.

According to Goldman Sachs Banks, every 50 basis point drop in the minimum serviceability requirement lets home buyers borrow up to 6 per cent more.

REUTERS