The Australian Prudential Regulation Authority (APRA) is calling for banks to ensure that any changes to the serviceability rules to accommodate refinancers must still follow the core intent of its guidance on credit risk management.

In a letter addressed to all authorised deposit-taking institutions, APRA said it is crucial that any changes or exceptions to the serviceability rules are implemented prudently. 

Under APRA’s current prudential framework in assessing a borrower’s repayment capacity, banks must include a 3-percentage points buffer to be applied above the current housing loan interest rate.

“The serviceability buffer provides a contingency for rises in interest rates over the life of the loan, as well as for any unforeseen changes in a borrower’s income or expenses,” APRA said.

“With the potential for interest rates to rise further, inflation still high and the possibility of weaker labour market outcomes, the buffer is an important risk mitigant.”

Exceptions to the serviceability policy

Some banks have recently announced changes to their exception processes to support borrowers that may be experiencing challenges. For instance, Westpac has started implementing new serviceability rules for those wanting to refinance.

APRA recognised that in the current environment, some borrowers who are seeking to refinance with another lender may no longer meet standard loan criteria.

This could be due to the higher interest rates and cost of living pressures affecting the serviceability buffer.

Another reason is the less equity borrowers have due to the recent declines in house prices.

APRA said an “exception to policy” occurs when a bank approves a loan that does not meet standard loan criteria, such as the serviceability buffer.

“Under APRA’s prudential framework, banks can use exceptions to policy if these are managed prudently and limited — this approach allows banks to consider additional indicators of repayment capacity beyond those captured in the standard serviceability test,” it said.

“For a borrower seeking to refinance, this could include past repayment behaviour.”

While serviceability policy exceptions have accounted for a small share of banks’ total housing lending at around 2% to 3%, historically, APRA said large volumes of exceptions can create risks by weakening banks’ risk profiles and increasing the vulnerability of their loan books to future shocks.

“In using exceptions, APRA expects banks to make a prudent assessment of repayment capacity so that there is a good outcome for borrowers and the financial system,” APRA said.

“Prudent banks would have acceptable reasons and clear justifications for loans written outside policy.”

Banks are also encouraged to consider Responsible Lending Obligations, which are administered by the Australian Securities and Investments Commission.

Furthermore, APRA said loans written as exceptions must be regularly reported to the relevant internal governance bodies of the bank and monitored against risk appetite limits.

“Prudent boards would assess the impact of any proposed changes to exceptions processes on the bank’s risk profile and risk appetite. This includes understanding the types of loans that are being written outside policy, such as like-for-like refinancing,” it said.

APRA said it will be monitoring exception trends closely and banks who are reporting large volumes of policy exceptions will be subject to “heightened supervisory attention”.


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