Last week, Westpac confirmed that it had updated its approach to assessing home loan applications for “some” new owner-occupied customers paying principal and interest for an “interim period only”.
The changes would enable Westpac’s credit officers to use their discretion when assessing a mortgage application from a borrower that falls short of passing the bank’s serviceability test, which is currently weighted against an interest rate floor of 7.25 per cent.
A Westpac spokesperson told Investor Daily sister publication Mortgage Business: “Where a customer applying for an owner-occupied, principal and interest loan falls just outside our current serviceability guidelines, the loan can be referred to a credit officer who will have the discretion to override a small serviceability deficiency on a case-by-case basis.”
The revision came in lieu of the Australian Prudential Regulation Authority’s proposed changes to its home lending guidelines, which include a proposal to remove the 7 per cent interest floor for mortgage serviceability assessments.
However, Westpac has now revealed that it would no longer push ahead with the changes after holding discussions with APRA.
“Following discussions with APRA, Westpac has suspended this change while the APRA serviceability guidance remains under review,” a spokesperson said.
An APRA spokesperson has noted that its current serviceability guidelines, while not legally binding, are designed to “encourage institutions to consider its guidance in implementing and embedding policies and practices”.
“APRA is consulting with the industry on the current guidance in relation to the application of interest rate floors and buffers,” the spokesperson told Mortgage Business.
“ADIs that are not following the current guidance must, through compensating controls, be able to demonstrate to APRA that they are continuing to lend prudently.”
The prudential regulator opened consultation on its proposals in March, with APRA chair Wayne Byres stating that the operating environment for ADIs had evolved in the past decade, prompting the regulator to review the ongoing appropriateness of the current guidance.
“With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7 per cent floor and actual rates paid has become quite wide in some cases — possibly unnecessarily so,” he said.
“In addition, the introduction of differential pricing in recent years — with a substantial gap emerging between interest rates for owner-occupiers with principal and interest loans on the one hand and investors with interest-only loans on the other — has meant that the merits of a single floor rate across all products have been substantially reduced.”
In response to APRA’s initial announcement, a Westpac spokesperson told Investor Daily sister publication The Adviser: “Westpac welcomes APRA’s consultative process.
“Westpac recognises that it’s our responsibility to find the right balance that appropriately supports customers to buy homes and protects the quality of the bank’s mortgage book.”
The consultation period closed on 18 June, with the prudential regulator expected to issue its formal response within the next few weeks.
