(Reuters) -Australian banks could face heightened supervisory attention if they make large exceptions in granting home loans to borrowers who fail to meet an industry standard, the country’s prudential regulator warned on Friday.
In a letter to banks, the Australian Prudential Regulation Authority (APRA) reiterated its expectations that lenders should extend home loans only if they believed the customer could repay at three percentage points higher than current market rates.
As interest rates have surged at a breakneck pace over the past year, the country’s “big four” banks have called on APRA to ease the rule, saying borrowers who took out home loans before had now failed the 3% serviceability test.
The cash rate in Australia currently stands at 4.1%, the highest since April 2012.
The country’s apex banking regulatory body allows lenders to make exceptions to the serviceability buffer if “managed prudently and limited”, and expects them to “make a prudent assessment of repayment capacity” of borrowers.
“It is important that exceptions are used in a prudent and limited manner, so as not to undermine the intent of the core policy,” the regulator said in a letter to the banks.
Historically, exceptions to the serviceability policy have accounted for only between 2% and 3% of banks’ total home loan portfolios, the APRA said.
Westpac Banking (NYSE:) Corp, the country’s third-biggest lender, had said last month that it would refinance loans for some borrowers who failed to meet the serviceability buffer.
Commonwealth Bank of Australia (OTC:) assesses customers seeking refinance or new loans “in line with regulatory requirements and does not apply any differentiated buffer”, the country’s top mortgage lender told Reuters.
The other three “big four” lenders, National Australia Bank (OTC:), Westpac, and ANZ Group Holdings, did not immediately respond to Reuters requests for comment.