The Australian banking regulator is tightening the requirements for home loans, with more to come

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SYDNEY, October 6 (Reuters) – The Australian Banking Authority on Wednesday tightened restrictions on home loans and pointed out possible further measures.

The Australian Prudential Regulation Authority (APRA) estimated that their higher benchmark for assessing home buyers’ ability to repay loans would reduce the maximum borrowing capacity of a typical borrower by about 5%.

However, with fewer than one in ten borrowers applying for the maximum loan, the vast majority of borrowers will not be affected by the change, analysts said.

House prices, which are already 20% higher than last year even with coronavirus lockdown measures in large cities, are therefore unlikely to be tamed and analysts expect further measures to be introduced.

“The rise in the proportion of heavily indebted borrowers and indebtedness in the household sector in general means that medium-term risks to financial stability are increasing,” APRA chairman Wayne Byres said in a statement.

The regulator expects home loan growth to outpace household income growth, with over a fifth of new loans approved in the June quarter already exceeding six times the borrower’s income.

In a letter to lenders, APRA said they should assess the ability of new borrowers to make their loan repayments at an interest rate that is at least 3 percentage points above the loan product rate, down from 2.5 percentage points now.

It also urged banks to review their risk appetite for lending at high debt-income levels, saying that if this lending continued to grow, further macroprudential intervention would be considered.

APRA said it will outline other capital and credit instruments it could deploy in the coming months, with some analysts anticipating further increases in the buffer.

“So we see today’s announcement as a clear signal of intent … and any evidence that investor lending is contributing to the strong price growth we are seeing right now is likely to have APRA firmly in its sights,” said Brendon Cooper. Head of Credit Strategy at lender Westpac.

In the past, the regulator has put restrictions on lending to investors and only on interest.

The bank’s stocks were mixed after the announcement, with Commonwealth Bank of Australia (CBA.AX), the largest lender, down 2.3%, while the shares of its three biggest competitors fell about 1%.

APRA said banks that continue to approve loans with the lower 2.5% buffer after October will need to increase their capital requirements to reflect higher credit risk.

Reporting by Wayne Cole and Paulina Duran; Editing by Richard Pullin and Christopher Cushing

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