Commonwealth Bank raises loan assessment floor rate

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    Australia’s largest bank has raised its loan serviceability floor rate, one day after regulators asked the country’s major banks to give assurances that they are lending responsibly.

    Commonwealth Bank of Australia (CBA) has raised its assessment floor rate – which is used to determine whether a client can afford a home loan – by 15 basis points to 5.25% from 5.10%, according to a report from the Australian Financial Review.

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    “We have taken into consideration the ongoing affordability for our customers during the life of their loan, as well as any potential changes the customer may incur,” CBA said in an email to mortgage brokers, as reported by AFR.

    The move comes a day after the Council of Financial Regulators – comprised of the Reserve Bank of Australia (RBA), the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), and the Australian Treasury – asked banks for assurances that they were “proactively managing” risks in their home loan books.

    “APRA has written to the largest [banks] to seek assurances that they are proactively managing risks within their housing loan portfolios and will maintain a strong focus on lending standards and lenders’ risk appetites,” the council said, according to a Reuters report.

    Sally Tindall, research director at RateCity.com.au, said that the move by the CBA is “prudent and responsible” and will “help ensure customers can afford their repayments when rate hikes kick in.”

    “Families who overstretch themselves to get into an overheated property market could end up in hot water when rates go up, especially if they haven’t had a decent pay rise in that time,” said Tindall. “Banks want to avoid this situation as much as customers do. While this change could limit the amount some customers can borrow, it’s designed to save them from mortgage stress in years to come.”

    Tindall added that other major banks may follow CBA’s lead in the coming months.

    “This move by CBA comes on the back of a warning from APRA to the big banks to proactively manage risky lending fuelled by skyrocketing property prices,” said Tindall. “We expect other banks will revise their floor rates upwards in coming months.”

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    Original Article