OREANDA-NEWS. Fitch Ratings says in a new report released, that future investors in Australian RMBS transactions will benefit from the tighter credit policies set out by the Australian regulators. The Australian Prudential Regulatory Authority (APRA) and Australian Securities and Investment Commission (ASIC) both released recommendations to lenders that target stricter methods of calculating debt-serviceability.

Fitch's analysis shows that the maximum loan amount available to borrowers falls significantly under the new standards, which include (1) an interest-rate buffer on both the borrowers' new and existing debt; (2) more conservative living expense assumptions; and (3) the treatment of interest only loan structures.

Lenders are now expected to apply interest rate buffers on the borrower's existing debt in serviceability calculations, whereas previously it had been common practice in the market not to stress interest rates on existing debt. The lending market seems to have settled on interest rate buffers of 2.2%-2.3% p.a. in response to these recommendations.

APRA and ASIC have also recommended the use of income-adjusted benchmarks for borrower living expenses in debt-serviceability calculations as opposed to expenditure benchmarks that do not vary with borrower income.

The report illustrates the significant impact these two changes have on borrowing capacity, particularly to borrowers with existing debt. Fitch's analysis finds that a couple with no dependents earning a combined gross income of AUD130,000 and holding an existing mortgage of AUD400,000 can have their new borrowing capacity diminish from AUD447,888 to AUD230,747 - a reduction of 48.5%.

Fitch believes this is a positive development for future Australian RMBS transactions, as new borrowers will not be as stretched in times of elevated interest rates or economic stress. The changes will have particular effect on borrowers with existing debt, making it more difficult to finance and acquire additional investment properties.