The Australian Prudential Regulation Authority (APRA) has written to all authorised deposit-taking institutions (ADIs) to reiterate its expectations around managing exceptions to housing lending policy.

The letter follows recent changes by some banks to their processes for granting exceptions to borrowers who don’t meet minimum home loan serviceability criteria, such as the 3 per cent serviceability buffer.

Under APRA’s prudential framework, ADIs must apply certain minimum criteria when assessing a borrower’s repayment capacity. This includes a 3 per cent minimum serviceability buffer, to be applied above the housing loan interest rate.

Under APRA’s Prudential Standard APS 220 Credit Risk Management, Prudential Practice Guide APG 220 Credit Risk Management, Prudential Practice Guide APG 223 Residential Mortgage Lending and Prudential Practice Guide APG 112 Capital Adequacy: Standardised Approach to Credit Risk, ADIs can use exceptions to policy if these are managed prudently and limited. This approach allows ADIs to take into account additional indicators of repayment capacity beyond those captured in the standard serviceability test. For a borrower seeking to refinance, this could include past repayment behaviour.

Background.

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