“14 out of 20 banks surveyed increased the interest rate to assess whether borrowers can service their home and investment loans.”
The banking regulator APRA said on Thursday it had conducted a “hypothetical borrower exercise” in early 2015, and again later that year, to compare due diligence of borrowing across various banks.
APRA insists banks should use a “serviceability buffer” of at least 2% above the interest rate on home and investment loans.
This reduces borrowing capacity and protects the bank’s loan book from defaults when interest rates rise. APRA wants the buffer to apply to both new loans and existing debt.
All banks are now operating with a buffer over the 7% floor for new loans, and all but two banks have a buffer above 7% for existing loans.
Several banks are also scaling-down the less stable sources of income when assessing borrower income. Income such as overtime, bonuses, commissions, investment dividends and rental income are now scaled-down.
Also, borrowers’ living expenses have been scaled-up to allow for future increases to cost of living.
Read more here: SMH Article