Banks have been urged to put a growth cap on home lending to investors of up to 10% annually and to add a 2% buffer to their home loan rates by the Australian Prudential Regulation Authority (APRA), amid rising house values in Sydney and Melbourne.

The APRA also said banks should set an interest rate floor of at least 7% when assessing a borrower’s ability to repay a mortgage.

The authority is set to review lending practices early next year to see if actions such as increasing capital requirements are need for individual banks.

Moreover, APRA said it would look deeper into high loan-to-income loans, high loan-to-valuation loans, interest-only loans to owner occupiers and loans with very long terms.

Australia’s housing sector regulators are growing concerned about the possibility of an unbalanced market due to speculative buying of homes to rent. Home loans to landlords now account over 50% of all mortgages and have marked the highest share on record.  

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