Refinancers caught in the crossfire of APRA’s tightening plan

October 24, 2017
Some Australian home owners looking to refinance their mortgage to reduce debt have discovered they are “stuck” with their current loan due to stricter rules enforced by the banking regulator.

One lender says tighter controls are penalising people with a good credit history on loans granted before the Australian Prudential Regulation Authority (APRA) tightened rules in 2015, which leave them unable to take advantage of better offers.

Tougher rules, refined in March, are aimed at improving banks’ and households’ balance sheets and include limiting new interest-only loans to 30 per cent of the market at loan-to-value ratios (LVRs) above 80 per cent, while the buffer for borrowers to service their loans has widened.
For refinancers, assumed expenses have increased and 20 per cent of the principal needs to have been paid before being eligible to secure a new loan for most lenders.

The rule changes have had “unintended consequences” for some, AMP chief economist Shane Oliver said.

It is well known that [APRA’s macro prudential controls] can have unintended consequences, which they regrettably aren’t necessarily aware of.AMP chief economist Shane Oliver

“It is well known that [APRA’s macro prudential controls] can have unintended consequences, which they regrettably aren’t necessarily aware of,” Dr Oliver said.

“An issue of that is borrowers coming in on the old lending standards and finding themselves unable to refinance.

“It’s probably a relatively small part of the market and the positive impact of tightening lending standards probably outweighs problems with that sector at the moment.”

Dr Oliver said the new standards will act as enforced belt-tightening for borrowers who are at the limit. They’ll need to pay more principal off before they can access lower interest rates with other banks and lenders.

AMP’s new serviceability criteria, for example, has new higher minimum weekly living expenses assumed for applicants at different incomes in its assessments for loan applicants.

A borrower with no dependents earning $300,000 a year, has minimal monthly expenses of about $3760 a month while families with two children are deemed to have minimum monthly expenses of $4000 on joint income of between $160,000 and $200,000.

Tic:Toc Homeloans chief executive Anthony Baum said there was a “reasonable chunk” of borrowers not meeting new serviceability standards when they apply to refinance their mortgage.

Despite no changes to their income or expenses, they are stuck with their current lender and unable to access a better deal, he said.

The one-year-old fintech, which offers online loan approval for its customers in 22 minutes and provides finance through second-tier partner Bendigo and Adelaide Bank, write 55 per cent of its business in refinanced mortgages.

“We see a lot of customers that don’t understand why they don’t pass serviceability tests when things are unchanged from when they were granted the loan previously,” Mr Baum said.

“Either they weren’t assessed properly in the first place or serviceability-related macro measures have meant they are not able to benefit from competition in the marketplace.

“They’re disadvantaged customers.”

One of Australia’s largest credit unions with a large home loan book, People’s Choice, said the new rules would affect about 3 per cent of borrowers seeking new loans.

“From what we have heard of industry estimates, we believe these changes would affect no more than 3 per cent of new loans but those borrowers would face a similar approach across the entire industry,” chief executive Steve Laidlaw said.

“The industry’s risk appetite has changed, led by APRA’s guidelines, ASIC’s responsible lending guidelines and the industry’s own view of prudent risk management practices.”

APRA chairman Wayne Byres has said the authorities’ rules were already making positive impacts.

“We’ve seen serviceability assessments strengthen, investor loan growth slow and high-LVR lending reduce. New interest-only lending has also fallen, and appears on track to fall below our benchmark later this year,” he told a Finsia event in Sydney last month.

“All of these moves are strengthening the quality of banks’ home loan portfolios, in an environment that continues to be one of heightened risk.”

The Reserve Bank and Turnbull government have been warning about Australians taking on too much household debt, which is high by global standards, without considering the impact it may have with rising interest rates or falling property prices.

The Australian Securities and Investments Commission is also tightening rules and lifting its scrutiny after analysis of borrower applications showed serviceability details were not being rigorously tested, pointing to lax prudential practices by lenders competing for market share.

In its financial stability review released last week, the Reserve Bank said households with high debt burdens could be vulnerable to financial stress if they experience large declines in income.

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