APRA's 7pc rule nonsensical when rates are so low: BNK boss

Banks no longer have to test whether their new mortgage customers can afford a 7 per cent interest rate when they’re at all-time lows, and the one small cap among them is delighted.

Banking regulator APRA has nixed the 7 per cent minimum serviceability requirement that banks had to use when assessing mortgage applications.

The move “makes a lot of sense, given the interest rate environment we are in”, says Simon Lyons, CEO of small-cap lender BNK Bank (ASX: BBC).

On Tuesday, the RBA cut the offical cash rate for the second time in two months to a record low of 1 per cent.

Lyons says a 7 per cent serviceability buffer was out of lockstep with the lower-for-longer outlook for rates.

“To assess a loan using a much higher buffer doesn’t make sense,” Lyons told Stockhead. In that context, “it’s good that APRA continues to review these things”.

Previously, banks needed to calculate the implied repayment ability of an applicant in the event that interest rates hit 7 per cent (the common industry standard was 7.25 per cent).

Now banks “will be able to review and set their own minimum interest rate floor”, as long as the interest rate buffer is at lease 2.5 per cent above the agreed rate term.

It’s the economy, stupid

Lyons believes this is not APRA scaling back stringent lending standards but a response to the macroeconomic environment.

The move is likely to free up lending and increase credit growth, which is currently sitting at an all-time low after the major banks drastically tightened their lending standards while the banking Royal Commission spotlight was on them.

But APRA has been relaxing its lending rules largely in response to economic factors. It removed the 30 per cent cap on new interest-only mortgages earlier this year.

No “major changes”

Lyons thinks the changes won’t have much impact on BNK, a digital bank with a focus on the WA market.

“Obviously this change will help some borrowers to qualify for loans that they would not have been able to do if the buffer remained in place, but is unlikely to result in major changes in the market place,” he said.

“We have to focus on continuing to win market share by offering better products and better service than our competitors.”

After raising $20m from investors last September at $1.30, BNK shares have struggled for traction and the stock was trading at 62 cents in afternoon trade.

BNK has been trying to get hip with the kids since late 2017, when it commissioned Clemenger BDO to find out what said kids thought of it when it was still Goldfields Money.