The Australian Prudential Regulation Authority (APRA) has written to authorised deposit-taking institutions (ADIs) outlining steps it plans to take to increase the level of supervisory oversight on mortgage lending.

At this stage, APRA does not propose to introduce increases in system-wide capital to address current risks in the housing market, or introduce new regulatory limits, although it will keep these options under active review.

APRA has notified ADIs that it will be paying particular attention to specific areas of prudential concern. These include:

• higher risk mortgage lending — for example, high loan-to-income loans, high loan-to-valuation (LVR) loans, interest-only loans to owner occupiers, and loans with very long terms;
• strong growth in lending to property investors — portfolio growth materially above a threshold of 10 per cent will be an important risk indicator for APRA supervisors in considering the need for further action;
• serviceability assessment tests for new borrowers — in APRA’s view, these should incorporate an interest rate buffer of at least 2 per cent above the loan product rate, and a floor lending rate of at least 7 per cent, when assessing borrowers’ ability to service their loans.

APRA will be focussing on the extent to which ADIs are lending at high multiples of borrower’s income, lending at high loan-to-valuation ratios, lending on an interest-only basis to owner-occupiers for lengthy periods and lending for very long terms.

Neither the 10 per cent growth in investor lending, or the 2 per cent serviceability buffer, are hard limits. According to APRA “These figures are intended to be trigger points for more intense supervisory action. Where banks are achieving materially faster growth, utilising a lower buffer, and/or otherwise materially growing the other higher risk parts of their portfolio, it will be a trigger for supervisors to consider whether more intensive supervisory action, including higher capital requirements, may be warranted.”

APRA says that these changes do not relate to the recommendation on risk weights in the Financial System Inquiry report.

APRA’s heightened supervisory focus on lending standards will be conducted in conjunction with the review of interest-only lending announced by the Australian Securities and Investments Commission (ASIC).