2/2/2024 0 Comments Biting the bullet synonyms![]() ![]() "APRA's reasoning for moving away from the 7 per cent level was that the floor would have been too high as rates declined - the gap between the floor and actual rates paid by borrowers would be unduly wide and unnecessarily restrictive to credit," the spokesman said. Professor Whelan said this translated to further risks for banks if a large enough proportion of customers began to default on their mortgage.Īn APRA spokesman told ABC Investigations: "Banks were still expected to use a floor, but APRA's new guidance allowed them to set their own level, which APRA monitors to ensure it is prudent." While the banks were lending more, it also shifted the onus of responsibility to the customer to make sure they could service the debt over the life of the loan. He said the watering down of regulations led to a change in the "power dynamic" between lenders and borrowers. Stephen Whelan says borrowers were pushed to their borrowing limit and that is risky for lending institutions. He added the serviceability minimum was there to also protect lenders beyond just "a point in time" and to "keep the longer-standing credit quality of mortgage portfolios at a prudent level".Īcross his four decades in the financial sector, Mr Homan observed lending institutions pushing borrowers to their absolute limit if the prudential regulations permitted it. "They have had a tendency to rely on the lending shop to tell them … 'Why borrow $500,000, when you can afford, you know, $1 million?'" ![]() "I think it's been almost frightening that people, in their own mind, don't have a sense of what the maximum mortgage is that they want or they're comfortable with. "It was designed to not have people over-gear themselves too much," he said. Mr Homan - who left APRA in 2016 to join the private sector before retiring this year - said the floor was a safety net for many borrowers who did not have the financial literacy to make accurate assessments of their future incomes and trusted the financial institution to advise them on what they could afford. The COVID-19 property boom is set to bite back against hundreds of thousands of borrowers holders over the next year. "The borrowing public needs some form of hedge against rising rates … they need some sort of protection," Mr Homan told ABC Investigations. It was a move that, Mr Homan said, with some benefit of hindsight, had led to a "bad outcome" for many Australians who had cashed in on the COVID-19 property boom and were now facing financial hardship as interest rates returned to historically average levels. Its removal was welcomed by then-treasurer Josh Frydenberg "as a positive development" that would "spur lending growth". However, the interest rate floor was scrapped by APRA in 2019, after lobbying from the banking sector. That floor meant lenders began assessing borrowers' ability to make repayments against a minimum of 7.25 per cent interest. It ensured that, if they procured their loan in a "lower-interest-rate environment" - like the one during the pandemic - they were not caught out when those rates rose. The architect of a crucial safeguard designed to protect the banking system from the risk of a widespread mortgage crisis says it should never have been abolished by the financial regulator.Īs the head of credit risk at the Australian Prudential Regulation Authority (APRA), Glenn Homan oversaw the introduction of a serviceability "floor" in 2014, as part of the regulator's attempt to rein in risky lending that was fuelling a runaway housing market.
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