APRA has increased the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications.

APRA has told lenders it expects they will assess new borrowers’ ability to meet their loan repayments at an interest rate at least 3 percentage points above the loan product rate. This compares to the current buffer of 2.5 percentage points.

The decision to increase tighten this macro prudential policy “reflects growing financial stability risks from ADIs’ residential mortgage lending” and was supported by other members of the Council of Financial Regulators, APRA says.

APRA Chair Wayne Byres says it’s a “targeted and judicious action designed to reinforce the stability of the financial system.”

It comes after the RBA reiterated the importance of prudent home lending standards as it decided to keep the official interest rate at a record low and to continue buying government bonds to ensure there’s enough stimulus in place to get the economy back on track.