Customers set to be able to borrow more as APRA moves to scrap key mortgage rules

Treasurer Josh Frydenberg has highlighted the "social responsibility" of banks to lend money as he backed a plan by the financial regulator that will lift the maximum amount of money a home buyer can borrow.

Fresh from a meeting he and Prime Minister Scott Morrison had with top officials from the Reserve Bank and the Australian Prudential Regulation Authority (APRA), Mr Frydenberg on Wednesday also acknowledged the "headwinds" facing the economy, including from the housing slump, but argued his planned tax cuts could help boost growth.

Speaking at the Stockbrokers and Financial Advisers Association conference in Sydney,  Mr Frydenberg welcomed APRA's plan, announced on Tuesday, to scrap a rule that has meant banks assess how new customers would cope if interest rates rose to 7.25 per cent, which is much higher than current rates.

“That’s a positive development. I think that will continue to spur lending,” Mr Frydenberg said.

Slower credit growth and falling house prices are forecast to slow the economy via weaker residential building investment. Mr Frydenberg acknowledged banks had become more risk averse, in part as a result of the banking royal commission. But he said that with the royal commission and the election now behind us, the sector had an opportunity to lend.

“The banks now have an opportunity to continue to provide the capital flows into the economy – that is their economic and their social responsibility. But they’re businesses, and they have to do all the appropriate credit checks and they have to make decisions that are in the best interests of their business. "

But at the same time, it’s important that the credit continues to flow in the economy, both to households and to businesses,” he said.

With housing slowing and dragging on growth, and interest rates on many loans below 4 per cent, the APRA on Tuesday proposed getting rid of the 7.25 per cent rule, and instead requiring banks to assess customers on the basis of a 2.5 per cent lift in rates from current levels.

Analysts predicted the change would lift the maximum amount an average household could borrow by tens of thousands of dollars, at a time when the RBA is also widely expected to cut interest rates to new record lows in an attempt to lift inflation and strenghten the labour market.

Dr Lowe also said the economy needed support from the federal budget, from infrastructure spending and other reforms that encourage business investment.

Mr Frydenberg said his discussion with the RBA and APRA had focused on both the challenges and the opportunities facing the Australian economy.

While drought, floods, housing and trade wars were dragging on activity, he said the opportunities included tax relief, infrastructure spending and the government's skills package in the budget.

“They’re the things that drive productivity gains, and in turn economic growth and more jobs. The [RBA} governor and the government both understand, as he said publicly, the importance of this tax relief as a means of delivering more disposable income into the hands of Australians,” Mr Frydenberg said.

He said the government remained "absolutely committed" to its pledge to deliver a budget surplus over the coming financial year.