Westpac announced that it would no longer relax its mortgage serviceability policy after discussions with the Australian Prudential Regulation Authority (APRA).

The major bank backpedalled just hours after confirming it would push through with the changes.

Westpac had disclosed that it would ease serviceability conditions on low-risk home loans, immediately pushing the borrowing capacity up to as much as 8%. The major bank enabled credit officers to use their discretion in approving principal and interest loans to owner-occupiers who previously did not meet the lending parameters, according to a spokesman for Westpac.

"We have recently updated our approach to assessing some new owner-occupier principal-and-interest home-loan applications for an interim period only," the spokesman told the Australian Financial Review.

The changes did not apply to investors or owner-occupiers with interest-only loans, according to the Australian Financial Review.

However, Westpac quickly reversed its decision.

Following the discussion with APRA, Westpac opted to suspend the modifications while the regulator’s serviceability guidance remains under review. APRA said that it is urging institutions to consider its guidance in implementing policies and practices.

The regulator warned authorised deposit-taking institutions (ADIs) that are not following its guidance to ensure that they will be able to prove that they are lending prudently.

APRA recently disclosed its response to the first round of consultation on its proposed changes to the capital framework for ADIs. The planned modifications include the easing of capital requirements for low-risk owner-occupied, principal-and-interest home loans; and started from Basel III – a banking regulations framework designed to promote financial stability.