APRA is removing the speed limit on investor lending.

The Australian Prudential Regulation Authority (APRA) says it will scrap restrictions that keep investor credit growth under 10 per cent a year, and replace them with measures it says will strengthen lending standards.

APRA's move to was highlighted in a recent submission to the banking royal commission.

A targeted review by the regulator criticised almost all major lenders for their residential mortgage serviceability, but identified Westpac as a “significant outlier”.

The review found numerous failings in serviceability checks on mortgages issued by Westpac.

Out of 420 Westpac loans, 29 per cent had incomplete minimum income verifications, 66 per cent had no itemised living expenses collected, 30 per cent misrepresented borrowers' financial positions, and 9 per cent would not have been approved if the “true financial information” was used.

The investor lending ‘speed limit’ was first introduced in 2014, and was later tightened to require banks to keep interest-only loans to less than 30 per cent of their mortgage portfolio.

APRA says the measures were only intended to be temporary.

APRA is now putting responsibility back on bank boards to provide assurance on the quality and safety of lending standards.

APRA said banks would be able to avoid the 10 per cent speed limit if:

  • Lending has been below the investor loan growth benchmark for at least the past 6 months;
  • Lending policies meet APRA's guidance on serviceability
  • Lending practices will be strengthened where necessary

APRA chairman Wayne Byres says it is just the start.

“The temporary benchmark on investor loan growth has served its purpose,” he said.

“Lending growth has moderated, standards have been lifted and oversight has improved.

“However, the environment remains one of heightened risk and there are still some practices that need to be further strengthened.”

APRA’s new plan requires banks to develop portfolio limits on how much new lending they will allow at very high debt-to-income levels.

They will also be forced to set policy limits on maximum debt-to-income levels for individual borrowers.

“This provides a simple backstop to complement the more complex and detailed serviceability calculation for individual borrowers, and takes into account the total borrowings of an applicant, rather than just the specific loan being applied for,” APRA said.