The Australian Prudential Regulation Authority (APRA) announced it will keep its current lending policy settings in place on Monday.
This includes no change to the 'serviceability buffer' that requires banks to approve home loans on the basis borrowers can absorb interest rate increases 3% higher than those they are applying for.
In simple terms, if they are applying for a loan at an interest rate of 6% p.a., their application will be assessed as if they are paying 9%.
The buffer is intended as a regulatory safety net to ensure borrowers have a fair chance of coping with interest rate increases or other unforeseen changes in their income or living expenses.
It was last changed in November 2021 when it went from 2.5% to 3.0%.
As well as the serviceability buffer, APRA has made no change to the two other policy tools at its disposal.
The 'countercyclical capital buffer' remains at 1% of risk-weighted lending.
This is the amount of capital APRA requires banks to hold as a cushion in periods of financial risk.
Its final policy tool - imposing lending limits - has not been applied.
"Uncertain" times
In keeping its policy settings on hold, APRA said it had taken into account the "uncertain interest rate and economic outlook" in its latest quarterly review.
It noted the current high levels of household debt and inflation still above the Reserve Bank of Australia's target range, as well as ongoing geopolitical stability.
APRA chair John Lonsdale said the regulator was concerned the level of overall risk to the financial system remained elevated.
"High debt-to-income and high loan-to-valuation ratio lending make up only small proportions of new lending," he said.
"Lending standards remain sound with banks able to make exceptions to their serviceability policy when it is prudent to do so."
The decision comes ahead of next week's Reserve Bank of Australia board meeting with speculation another interest rate rise may be on the table if the quarterly consumer price index figure come in higher than expected on Wednesday.
What does it mean for the home lending market?
Some major bank CEOs have been calling for a drop in the serviceability buffer for some time, saying it is preventing them from lending to households on lower and even middle incomes.
APRA's buffer applies to banks, credit unions, and building societies but does not cover non-bank lenders.
They come under the umbrella of the Australian Securities and Investment Commission and are required to meet general responsible lending provisions; non-banks typically apply a 2 to 2.5% buffer instead.
Before departing as NAB CEO in April, Ross McEwan criticised tightening rules and regulations for "locking out" some people from securing bank loans and driving them to "riskier" lenders.
Just last month, ANZ boss Shayne Elliott said APRA's restrictive policies were making it increasingly difficult for banks to provide home loans.
The buffer has also been described as paternalistic by a former RBA central banker.
In mid-2023, a few banks also started to apply 1% buffers - instead of 3% - to selected refinancing customers.
This was done to prevent "perverse" outcomes in the lending market, according to Australian Banking Association CEO Anna Bligh.
Data from the prudential regulator shows a spike in new home loans 'excepted' from the buffer during that time, up to $6.714 billion in the September 2023 quarter - a 38% spike on the prior quarter.
In the three months to December 2023, nearly $7.3 billion of loans were exempted, the highest level since records began in March 2019.
Compared to the wider lending market, however, this is small fry, with more than $154 billion in new loans written and refinanced during the December 2023 quarter.
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