APRA rules: why banks decline property loans

Who APRA is

The Australian Prudential Regulation Authority supervises banks, building societies, credit unions, insurers and most superannuation funds. Its job is to make sure these institutions stay financially sound so that depositors, policyholders and members are protected. For lending, APRA's focus is on whether banks hold enough capital and manage credit risk well. Its standards and guidance are published at apra.gov.au.

APRA does not approve or decline individual loans. Banks make those decisions. But the prudential framework shapes how much risk a bank is willing to take on, and that is why many property borrowers find a bank's answer is no, or yes with conditions that do not work for their project.

How prudential standards influence property lending

Capital adequacy

Banks must hold capital against the loans they make. The capital framework assigns higher risk weights to loans considered riskier, which means the bank must hold more of its own capital for each dollar lent. Land subdivision, development and some commercial property loans attract higher risk weights than standard home loans. Holding more capital makes these loans more expensive for the bank, which narrows its appetite.

Credit risk management

APRA's credit risk management standard expects banks to have sound policies for assessing, approving and monitoring loans, including concentration limits and valuation practices. For development lending, this usually translates into pre-sale requirements, cost-to-complete tests, quantity surveyor reports and strict loan-to-value limits. Our lesson on LVR, ICR, DSCR and other ratios explains these measures.

Large exposures and concentration

Banks must limit their exposure to single borrowers and to concentrations in particular sectors. A bank that already has a lot of development lending in one city may decline a new project there, even if the project itself is sound.

Serviceability for residential lending

For home lending, APRA has set expectations about the interest rate buffer banks use when testing whether a borrower can afford repayments. These settings affect how much individuals can borrow and are set out in APRA's guidance on residential mortgage lending.

What this means in practice

Borrowers often meet the prudential framework through specific policy settings:

• Pre-sale requirements on residential developments before a bank will fund construction.
• Lower leverage on land without approval or on specialised assets.
• Strong serviceability tests that self-employed or asset-rich, income-light borrowers struggle to meet.
• Longer credit processes with more internal sign-offs for larger or unusual loans.
• Reluctance to take second-ranking security or to lend behind another lender.

None of these are unreasonable from the bank's perspective. They reflect the bank's obligations to depositors. But they leave gaps that private lenders fill, from pre-development and DA funding through to construction finance with limited pre-sales.

How private lenders differ

Private lenders raise money from investors, funds and wholesale facilities instead of taking deposits. They are not subject to APRA's capital standards in the same way. That gives them room to:

• lend on land before approvals are in place;
• accept fewer pre-sales on construction;
• take second-ranking security or lend by caveat;
• decide quickly with a smaller credit committee;
• look more at the security and exit than at ongoing income.

The trade-off is cost and term. Private loans usually carry higher interest rates and fees and are designed to be repaid within a short period, often by refinancing to a bank once the project meets bank criteria. Our article on exit strategies explains how that hand-back works, and the overview of Australia's private credit market describes the lenders involved.

APRA and non-bank lenders

APRA's role is not completely separate from non-banks. Many non-bank lenders are registered financial corporations that must report lending data to APRA. APRA also has powers to make rules for non-bank lenders where their activity materially contributes to financial stability risks. The Reserve Bank's Financial Stability Review at rba.gov.au regularly discusses the growth of private credit and its links to the banking system.

Conduct regulation of non-banks, including licensing, sits with ASIC. Our guide to ASIC registers explains how to check a lender's licences.

Questions to ask your bank before you go private

Before turning to a private lender, it is worth asking your bank:

• Which specific policy prevents the loan, such as pre-sales, leverage or serviceability?
• Would a smaller loan, more equity or a different structure meet policy?
• Would the bank fund the loan at a later stage, such as after approval or after a set level of sales?
• Would the bank accept a private lender for an early stage and then refinance?

The answers help you plan a staged approach where a private loan bridges to bank finance, rather than staying with higher-cost money for longer than necessary.

Costs and risks of moving to private finance

A private loan can make a project possible, but it changes the numbers. Higher interest and fees reduce profit, and short terms add pressure if sales or approvals are delayed. Read our guide to term sheet fees and default clauses and run your feasibility with realistic timing. If your project involves GST, the cashflow effects are covered in our guide to the GST margin scheme and development cashflow.

Why policy settings change over time

Prudential settings are not fixed. APRA adjusts its guidance as conditions change, and banks update their credit policies in response to their own experience, funding costs and portfolio mix. A loan a bank declined last year may fit policy now, and the reverse is also true. If you have been declined, ask again when circumstances change, such as after planning approval, after more pre-sales or after a period of stronger trading. Keep in touch with your bank even while a private lender funds an earlier stage, so a refinance is easier to arrange when the time comes.

A worked example

A developer, Lee, holds a site with planning approval for a small townhouse project. Lee's bank likes the project but requires a level of pre-sales before it will fund construction, and the sales campaign has only just started. Rather than wait, Lee takes a private construction loan at higher cost, with a lower loan-to-value ratio and a shorter term. As construction progresses, more townhouses sell off the plan. Once the bank's pre-sale requirement is met and the build is well advanced, Lee asks the bank to refinance the remaining debt on its standard terms. The private loan served as a bridge to bank finance rather than a permanent solution, which kept the total cost lower than funding the whole project privately.

Reading APRA's own material

APRA's website groups its prudential standards by industry and topic. For banking, look for the standards on capital adequacy and credit risk management, along with the related prudential practice guides that explain APRA's expectations in more detail. APRA also publishes quarterly statistics on bank property exposures. These documents are written for institutions, but the summaries and media releases are often readable for borrowers who want to understand why lending conditions have changed.

Further reading

• Construction finance
• Private credit explained
• How private lending works