The Australian Prudential Regulation Authority (APRA) has confirmed its guidance on the buffer and floor rates used in borrower serviceability assessments set out in Prudential Practice Guide APG 223 Residential Mortgage Lending (APG 223) in particular that it is appropriate to remove the quantitative guidance on the floor rate of at least seven percent from APG 223.
APRA will still expect ADIs to determine, and keep under regular review, their own floor rate(s) based on the current position within the interest rate cycle, and their portfolio mix and risk appetite.
APRA remains of the view that, with the removal of the seven percent serviceability floor from APG 223, the increase in the expected level of interest rate buffer will ensure that sufficient prudence is retained in ADIs’ serviceability assessments, accounting for the inherent uncertainty in lending decisions.
APRA confirms that the minimum interest rate buffer that APRA considers a prudent ADI would use in its serviceability assessment is two and a half percent.
For the purpose of clarity, APRA also considers it good practice for a prudent ADI to apply its interest rate buffers and floors to the actual rate to be paid by the customer (but excluding honeymoon rates and discounted introductory rates), rather than the standard variable rate.
While APRA considers it good practice to use a single set of serviceability criteria across all mortgage products, an ADI can choose to use different serviceability criteria, including multiple buffers and floor rates, for different products. Where an ADI chooses to do so, APRA expects the ADI to articulate the rationale for using differential criteria and any implications for the ADI’s risk profile and risk appetite.