It just might be that little bit harder to get a home loan thanks to APRA increasing the serviceability buffer.

When COVID-19 first broke out, interest rates were reduced to record lows and that helped spark significant growth in lending, particularly loans to first-home buyers.

But in recent months, concerns have been expressed about the impact on housing affordability and capacity of borrowers to repay when interest rates go up.

APRA increases serviceability buffer

Today APRA – the Australian Prudential Regulation Authority – has finally acted.

Specifically it has told the big banks it expects it to increase the so-called serviceability buffer from 2.5% to 3% from the end of October.

The serviceability buffer assesses new borrower’s ability to make loan repayments if interest rates rise, or there’s a change in their personal circumstances.

It’s a figure added onto the rate of an existing mortgage.

Previously, banks assessed home loan applicants by testing whether they could still repay a mortgage if the loan rate was 2.5% higher. Now they will test it to a more stringent standard — 3% higher.

“In taking action, APRA is focused on ensuring the financial system remains safe, and that banks are lending to borrowers who can afford the level of debt they are taking on – both today and into the future,” said APRA chairman Wayne Byres.

“While the banking system is well capitalised and lending standards overall have held up, increases in the share of heavily indebted borrowers, and leverage in the household sector more broadly, mean that medium-term risks to financial stability are building.”

Byres noted more than one in five loans approved in the June quarter were over 6 times the borrower’s income.

With income growth not expected to match the growth in credit, action was needed.

Although he acknowledged the banking sector was well capitalised and lending standards were sound, high levels of indebtedness represented a major risk to the financial system.

“With the economy expected to bounce back as lockdowns begin to be lifted around the country, the balance of risks is such that stronger serviceability standards are warranted,” he said.

More regulation coming

In addition, Byres said APRA may not be done taking action.

In a letter to the banks, Byres also requested banks to “review their risk appetites for lending at high debt-to-income ratios”.

He also promised to continue watching the growth in high debt to income loans.

“Should concentrations of this lending continue to rise, APRA would consider the need for further macro-prudential measures,” he said.

On both previous occasions macro-prudential policy was implemented — 2014 and 2017 — some heat came out of the property market.

So analysts will be watching what happens in the months ahead as annual house prices gains hold near record highs of around 20%.

Which ASX stocks might be affected by the APRA serviceability buffer increase?

While many new lending stocks have hit the bourse since COVID-19 most specialise in personal loans.

Two of the exemptions Liberty (ASX:LFG) and Pepper (ASX:PPM) and they join the Big 4 bank stocks as well as Resimac (ASX:RMC) as companies which might be affected.

Morningstar analyst Nathan Zaia said last week the extent to which bank would be affected would depend on what size of the banks’ books home loans made up as well as what regulations.

CBA (ASX:CBA) and Westpac (ASX:WBC) would be more affected, with home loans making up around 70% of their loan books while for ANZ (ASX:ANZ) and NAB (ASX:NAB) it was just 60%.

Speaking with Stockhead, he said the larger banks would be affected by caps on investor loans as well as high loan to value ratios.

“The major banks tend to do more in the investor market and high LVR and trickier types of loans than smaller regional lenders,” Zaia explained.

Nonetheless he also said a delayed economic recovery was a greater threat to the banks.

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