Key banking regulator APRA has revealed a set of changes that will, over time, shake up the home lending and small to medium business sectors and make it more expensive for self-managed super funds and other investors to maintain their current strong drive back into the housing sector.
As a result of the changes, Australia’s major home lending banks – Commonwealth, Westpac, ANZ and the NAB will have to hold more capital against investor, interest only home loans and home loans with high loan to valuation ratios – a measure that will force up the cost of those loans to borrowers.
Loans to owner occupiers borrowing on the standard principal and interest loan will not have to pay more.
The new capital rules from the key regulator, APRA are the culmination of four years of discussions and most major lenders have already been adjusting their lending practices in anticipation of the new rules starting from January 2023.
They will also apply to other home lenders active in these areas.
Banks will be able to hold less capital against loans to borrowers with bigger purchase deposits, and for some small business, corporate and commercial property lending, lifting returns.
Business loans will require less capital, a move that should, over time, see a fall in the cost of loans to small and medium enterprises.
According to analysts, 57% of lenders already offer what are becoming known as ’tailored’ loans based on the size of the initial deposit. The ANZ, for instance offers a 0.2% cut in the lending rate to those with an LVR of 70% or less (ie, a 30% of the purchase price deposit).
The new rules came after four years of consultation on the implementation of the new Basel III-aligned set of standards change the models used by banks to work out how much capital they need to hold.
The new requirements will not require banks to raise more capital.
Instead, under the new framework, banks will hold a larger portion of regulatory capital in the form of buffers or cash that can absorb losses in times of stress, the regulator said.
Instead, the current requirement imposed on Australia’s four largest lenders to maintain core capital above the minimum benchmark of 10.5% to be deemed “unquestionably strong” will be replaced by bank-specific minimum ratios.
“Although Australia’s banking sector is already strongly capitalised by international standards, the new capital framework will help ensure it stays that way,” APRA Chair Wayne Byres said.
The new framework will also improve the comparability of Australian banks with global peers, Byres added.
Under the new rules, home loans to investors, interest-only mortgages and those with loan to valuation ratios above 80% will be considered riskier and assigned higher risk weights, the regulator said.
Loans to owner-occupiers borrowing on a principal and interest basis will be considered lower risk and require less capital.
Smaller banks will also be able to allocate less capital to unsecured loans to small and medium sized business, the paper said.
“The capital framework has been designed to allocate higher capital requirements for higher risk lending, and lower requirements for lower risk,” the regulator said in an information paper published on Monday.
“This both incentivises banks to lend prudently, and requires more capital to be held for riskier loans that have a higher probability and impact of loss.”
Local banking analysts expect the new rules will slowly reshape mortgage pricing as banks will compete for loans requiring the least capital.
The four majors – the CBA, Westpac, ANZ and the NAB will likely pass on the higher cost of holding more capital for the riskier mortgages.
Macquarie Group, which is a major funder of white label home lending – especially to investors – will not benefit.
