Fitch Ratings believes that the Australian Prudential Regulation Authority (APRA) proposals to remove the seven per cent interest-rate floor for mortgage underwriting could slightly raise risk within mortgage portfolios, where borrowers are granted mortgages based on lower debt service thresholds.
Although the proposal would not significantly weaken the quality of assets of Australia’s authorised deposit-taking institutions (ADI), it could lead to risks building up in the system, the firm said.
Current lending guidelines forced ADIs to assess loan serviceability while using the higher of a seven per cent interest rate floor or two per cent buffer over the loan’s interest rate while most institutions adopted interest rates above these guidelines.
Fitch also said that other components of underwriting were strengthened significantly since the interest rate floor was first introduced in late 2014, including total debt-servicing measures and expense verification which meant that the quality of mortgages originated under the new framework should still be better than that of mortgages originated prior to 2015.
“APRA’s proposals follow the removal of investor lending and interest-only speed limits in 2018 if certain conditions were met and represent further loosening in prudential standards and guidelines,” Fitch said.
“Many of these controls were introduced as temporary measures amid rapidly rising house prices, which have since abated, in a low interest-rate and high household-debt environment.
“We expect the regulator to re-impose limits should risks re-emerge. The proposal is subject to a consultation process, which closes 18 June, 2019.”