Tighter mortgage lending rules raise chances of more rate cuts

Today’s announcement that the Australian Prudential Regulation Authority has introduced tighter mortgage lending rules will go some way to addressing the RBA’s concerns about the overheating housing market and the associated risks to financial stability. If these policies take some heat out of the market at the same time that the labour market and/or underlying inflation are weaker than the RBA expects, then interest rate cuts may come back on to the RBA’s agenda later this year. APRA today said that it expects banks to “immediately take steps” to limit the issuance of new interestonly mortgages and restrain lending growth to high risk mortgage borrowers. From now on, only 30% of a bank’s new residential mortgages can be interest-only loans. And within that, APRA has instructed banks to implement “strict and closely monitored internal risk limits” on those with a loan to value ratio greater than 80%. And while APRA didn’t alter the existing serviceability requirements, which entail borrowers to be able withstand a 2.0% rise in their mortgage rate, it did stress that this is a “minimum expectation” and that banks should periodically monitor whether tighter requirements are warranted.  Banks will need to cut the share of interest-only loans from the current rate of 37.5% of total lending to 30.0%. That 7.5% fall is equivalent to banks reducing lending by up to $7.5bn per quarter or $30bn per year.