The Australian Prudential Regulation Authority (APRA) has announced it will remove the investor loan growth benchmark for APRA regulated ADIs from 1 July 2018 subject to conditions.

The 10 per cent benchmark on investor loan growth was a temporary measure, introduced in 2014 as part of a range of actions to reduce higher risk lending and improve practices.

APRA is now prepared to remove the investor growth benchmark, where the board of an ADI is able to confirm by 31 May 2018 that:

• lending has been below the investor loan growth benchmark for at least the past 6 months;
• lending policies meet APRA’s guidance on serviceability; and
• lending practices will be strengthened where necessary.

For ADIs that do not provide the required commitments to APRA, the investor loan growth benchmark will continue to apply.

The benchmark on interest-only lending, established in March 2017, will continue to apply until further notice.

Lending policies

The assurance provided by the Board should confirm that lending policies meet APRA’s guidance on serviceability assessments as set out in Prudential Practice Guide APG 223 – Residential Mortgage Lending (APG 223). This should include that serviceability assessments incorporate:

• interest rate buffers comfortably above 2 percentage points over the loan product rate, and interest rate floors comfortably above 7 per cent;
• application of these interest rate buffers and floors to both a borrower’s new and existing debt commitments, with sufficiently conservative proxies used where necessary;
• discounts on uncertain and variable income, with haircuts of at least 20 per cent for most types of non-salary income and expected rental income; and
• for interest-only loans, an assessment of serviceability for the period over which the principal and interest repayments apply (i.e. excluding the interest-only term).

Lending practices

The assurance provided by the Board should also confirm that lending practices meet APRA’s guidance on the assessment of borrower financial information and management of overrides, as set out in APG 223. In particular, APRA expects ADIs to commit to:

• improving where necessary the collection of information on borrowers’ actual expenses, to reduce reliance on benchmark estimates. The use of benchmarks should be closely monitored, and applied in a low proportion of lending (consistent with the typically low calibration of such estimates);
•  strengthening controls to verify borrowers’ existing debt commitments, and preparing to participate in the new comprehensive credit reporting (CCR) regime in the future;
• prudently managing overrides to lending policies, with risk tolerances set by the Board on the extent of exceptions to serviceability policy (negative serviceability) and serviceability verification waivers; and
• developing internal risk appetite limits on the proportion of new lending at very high debt to income levels (where debt is greater than 6 times a borrower’s income), and policy limits on maximum debt to income levels for individual borrowers.