A Commonwealth Bank of Australia (ASX: CBA) decision made the headlines today, as it increased its loan assessment for borrowers.
According to reporting by News Corp (ASX: NWS) and the Australian Financial Review, CBA is going to be adopting a stricter assessment of the capacity of some borrowers to repay their home loans at higher interest rates.
CBA has recently increased its interest rate on fixed interest rate mortgages. It has now increased the interest rate floor on which it assesses home loans to 5.25%, up from 5.1%, according to the AFR. However, the interest rate buffer would remain at 2.5% – that's the rate above the current interest rate that the bank stress tests prospective borrower.
The biggest ASX bank reportedly said that many of its borrowers are not at capacity – only 1.3% of new home loan applications are expected to be hit by this higher floor.
The AFR quoted what the bank said in an email to mortgage brokers:
We have taken into consideration the ongoing affordability for our customers during the life of their loan, as well as any potential changes the customer may incur.
close up young man hand press on calculator to check and summary expense of home loan mortgage for refinance plan , people lifestyle concept
Regulators taking a closer look
This came a day after the quarterly statement by the Council of Financial Regulators. There are four members – the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), the Reserve Bank of Australia (RBA) and The Treasury. The Reserve Bank Governor chairs the CFR and the RBA provides secretariat support.
In that statement, the CFR said:
Members discussed developments in household borrowing and the housing market. Housing credit growth has picked up and a further increase is expected over the months ahead. Over the past few years owner-occupiers have accounted for most of the increase in household borrowing. The demand for credit by investors has been subdued, but is now increasing. Housing markets are strong across Australia.
Council members reiterated the need for lending standards to remain sound in an environment of low interest rates and rising housing prices. There have been signs of some increased risk taking recently, but overall lending standards in Australia remain sound. APRA has written to the largest Authorised Deposit-taking Institutions (ADIs) to seek assurances that they are proactively managing risks within their housing loan portfolios, and will maintain a strong focus on lending standards and lenders' risk appetites.
Council members are also paying close attention to the implications of trends in household debt. They discussed the risks that could build if growth in household borrowing substantially outpaced that in income, as well as potential policy options to address these risks.
The banks have been put on notice.
Time will tell whether the other banks of Australia and New Zealand Banking Group Ltd (ASX: ANZ), National Australia Bank Ltd (ASX: ANZ), Westpac Banking Corp (ASX: WBC), Bank of Queensland Limited (ASX: BOQ), Bendigo and Adelaide Bank Ltd (ASX: BEN), Suncorp Group Ltd (ASX: SUN), MyState Limited (ASX: MYS) or Macquarie Group Ltd (ASX: MQG) make any changes after CBA's change.
