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Australian banks begin lowering mortgage stress test rates

Stock MarketsJul 16, 2019 03:14AM ET
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© Reuters. FILE PHOTO: An CBA bank logo is pictured in Sydney

By Paulina Duran

SYDNEY (Reuters) - Westpac Banking Corp (AX:WBC) and Australia and New Zealand Banking Group (AX:ANZ) are starting to lower the interest rate they use to stress test customers' loan applications, a move expected to help stabilize house prices.

The banks are the first two of the Big Four lenders dominating Australia's banking system to implement the loosening of mortgage lending rules, introduced by the prudential regulator earlier this month.

From Tuesday, Westpac now assesses the serviceability capacity of its customers using the lower of 2.5% over its lending rate, or a minimum 5.75% floor test, according to its website.

That compares with a 7.25% minimum testing rate the banks used before the regulator removed the mandated floor.

The Australian Prudential (LON:PRU) Regulation Authority (APRA) earlier this month scrapped the minimum testing rate as it added to the stimulatory tools being deployed to revive the country's sluggish economy.

ANZ told clients on Friday that its new floor rate for retail lending would fall to 5.50% from Monday, according to a marketing memo seen by Reuters.

A spokeswoman for Commonwealth Bank of Australia (AX:CBA) said the bank was in the process of reviewing its own testing rate.

In an emailed statement, a spokeswoman for National Australia Bank (AX:NAB) said "now is the right time to change the approach to how the affordability rate floor is determined, given the continuing low interest rate environment." She did not reveal the new testing rate applied by the bank.

Following a protracted property downturn, the Reserve Bank of Australia (RBA) on Tuesday said house prices were now stabilizing and APRA's credit easing measure was "likely to see a boost in borrowing capacity for many new borrowers", its July policy meeting minutes showed.

The central bank, however, said it does not expect a material pick-up in borrowing.

The move means that borrowers applying for home loans carrying variable loan rates of about 3.5% will now be tested on their ability to repay a loan carrying 6% interest - that is 1.5 percentage points lower than before.

According to analysts, every 1% drop lets home buyers borrow up to 10% more.

The spring season in the housing market would be a key litmus test for whether the changes have worked, Royal Bank of Canada said in a note to clients.

Australian banks begin lowering mortgage stress test rates

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