Standard property loans

1. A loan must meet all of the requirements set out in paragraphs 3 to 7 of this Attachment to be classified as standard.

2. An ADI must have unequivocal enforcement rights over the mortgaged property at all times, including a right to possession and power of sale in the event of default by the borrower. An ADI must reasonably consider that it would be able to realise the value of the property provided as security within a reasonable timeframe.

3. An ADI’s exposure must be secured by a registered first mortgage over the property, or by a registered second mortgage which satisfies the following conditions:

   1. the ADI must obtain the written consent of the first mortgagee for the second mortgage, and confirm the maximum outstanding amount of the loan secured by the first mortgage (including the maximum drawdown or limit of the facility) for LVR purposes;
   2. the ADI must ensure that the amount secured by the first mortgage cannot be increased without being subordinate to the second mortgage;
   3. the ADI, as second mortgagee, must be able to exercise its power of sale over the property independently of any other mortgagee over the property; and
   4. where the sale of the property is not carried out by means of a public auction, the first mortgagee must be required to take reasonable steps to obtain a fair market value, or the best price that may be obtained in the circumstances, when exercising any power of sale (i.e. it is not possible for the first mortgagee to sell the property on its own at a discounted value to the detriment of the ADI).

4. An ADI must, prior to loan approval, appropriately document, assess and verify the ability of the borrower to meet their repayment obligations. This must, at a minimum, include:

   1. consideration of the impact of higher interest rates on the ability of the borrower to repay;

   2. the application of the assessment in paragraph 5(a) of this Attachment to the loan being assessed for approval and all existing and ongoing debt commitments of the borrower(s), both secured and unsecured;

   3. for interest-only loans secured by residential property, an assessment of serviceability for the specific term over which principal-and-interest repayments apply, excluding the interest-only period; and

   4. where the repayment of a commercial property loan is dependent on the cash flows generated by the property through rental income, an assessment of the tenancy profile relative to the maturity of the loan.

Where an ADI’s assessment does not result in a positive determination of the borrower’s ability to meet their repayment obligations, an ADI must classify the loan as non-standard.