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Heads of the broking industry have called for more leniency with serviceability buffers.
The Australian Prudential Regulation Authority (APRA) announced that it will hold its macroprudential policy settings on hold following its latest quarterly assessment of domestic and international economic conditions.
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As a result of APRA’s assessment, the mortgage serviceability buffer will be kept at 3 percentage points, considering an “uncertain interest rate and economic outlook” and high levels of household debt and inflation still about the Reserve Bank of Australia’s (RBA) target range.
The regulator said that the “quality of new housing lending remains sound” and, despite an increase in arrears over recent months, they still remain below pandemic peaks.
APRA chair John Lonsdale said the regulator was concerned that the “level of overall risk to the financial system remained elevated”.
“Our macroprudential policy settings play an important role in guarding against risks to the financial soundness of banks that could, in turn, undermine the stability of the Australian financial system,” Lonsdale said.
“Looking across the economy, we can see that credit growth for home purchases has moderated from its heights during the pandemic and is now a little below its long-term average.
“High debt-to-income and high loan-to-valuation ratio lending make up only small proportions of new lending. Lending standards remain sound with banks able to make exceptions to their serviceability policy when it is prudent to do so.”
Lonsdale further said that while the number of non-performing loans across both residential and commercial portfolios remains low, “it is slowly trending upwards”.
“Given the uncertain economic and interest rate outlook, including the possibility of higher cost-of-living pressures, it is important that prudent buffers are incorporated in serviceability assessments,” Lonsdale said.
“APRA will continue to monitor closely bank lending standards and the broader operating environment and should we believe a change in macroprudential settings is necessary, we will make the appropriate adjustments where needed.”
Buffer still ‘too high’
Reacting to APRA’s decision, heads of the Finance Brokers Association of Australia (FBAA) and the Mortgage & Finance Association of Australia have called for greater flexibility from lenders in regard to serviceability buffers.
Speaking to The Adviser, CEO of the MFAA, Anja Pannek, said: “In our refinancing and mortgage stress survey results released earlier this year, our members confirmed that serviceability continues to be the number one barrier for clients looking to refinance, with the 3 per cent APRA serviceability buffer rate being a key factor in borrowers being unable to meet serviceability requirements.
“The APRA buffer rate plays an important role in responsible lending, and there is no doubt that the buffer has helped a number of existing borrowers withstand interest rate increases over the past two years.
“However, that same buffer rate is now preventing home owners with a solid repayment history and capacity to repay from refinancing to a lower rate, more competitive loan – in effect contributing to existing borrowers becoming mortgage prisoners.”
She further said that in the middle of a cost-of-living crisis, there is a growing number of borrowers at risk of, or in, mortgage stress and it should be “easier for these borrowers to get access to a better rate on their home loan”.
“We believe there should be greater flexibility for lenders to assess applications using the 1 per cent buffer, for like-for-like refinances so people can move to a loan better suited to their current needs,” Pannek said.
“On behalf of our members, we have been vocal on the need not only for lenders to be able to be more flexible when applying buffer rates for serviceability, but also for the home loan discharge process to be improved so borrowers are not kept in higher cost loans for any longer than necessary.”
Managing director of the FBAA, Peter White, told The Adviser he believes the serviceability buffer is “still too high” despite it not changing the dynamics of lending today.
“We’re in a marketplace where [interest rates] are stable, I don’t see rates going up again for quite a long time,” White said.
“The $64 million question is, when do rates go down? Now with certain indicators, [it’ll be] probably the back end of the first quarter of 2025 before we see [rate cuts].
“Three per cent, in my mind, is still too high. I’d like it to be around one and a half to 2 per cent.”
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