The Australian Prudential Regulation Authority (APRA) has issued draft revisions to its guidance in APG 223 Residential Mortgage Lending on the interest rates to be used in serviceability assessments that authorised deposit-taking institutions (ADIs) perform on residential mortgage loan applications.

APRA is proposing to remove its guidance issued in December 2014 that ADIs should assess whether borrowers can afford their repayment obligations using a minimum interest rate of at least 7 percent. Instead, ADIs would be permitted to review and set their own minimum interest rate floor for use in serviceability assessments.

APRA has also proposed that ADIs’ serviceability assessments incorporate an interest rate buffer of 2.5 percent instead of the current 2 percent.

The interest rate buffer would be applied to the loan’s interest rate ignoring any introductory or honeymoon rates offered for a limited period at the origination of the loan.

The principal purpose of the serviceability buffer and floor is to ensure borrowers are able to continue to service and repay their loans if interest rates rise.