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Members of industry have fronted the Senate inquiry to showcase the benefits of changing serviceability buffers to improve home ownership uptake in Australia.
On Wednesday (16 October), the Senate inquiry into the financial regulatory framework and home ownership - held by the economics references committee, chaired by Senator Andrew Bragg - to hear evidence from those who had provided submissions to the inquiry.
Several speakers from the industry were called to give evidence yesterday, including MFAA CEO Anja Pannek, FBAA external regulatory compliance adviser David Carson, Mortgage Choice CEO and REA Group’s financial services CEO Anthony Waldron (speaking alongside PropTrack’s executive manager economic research Cameron Kusher) and Ello Lending managing director Ranin Mendis.
While all members agreed that the concept behind a buffer was “sensible” and has in the past contributed to the stability of the market, the blanket approach to how it is applied and its inflexibility were questioned.
During the hearings, the Senate delved into the recommendations put forward by the FBAA and MFAA (as well as those put forward by individual brokers), particularly focusing on calls to change the serviceability buffer so that it is either reduced from its current 3 per cent level, tweaked for first home buyers, or changed to be a “dynamic” buffer that adjusts with interest rates.
A dynamic rate
When asked what the impact of the 3 per cent buffer had been on home buyers, Pannek said: “Feedback from our members has highlighted that the buffer at 3 per cent… has proven a challenge for first time buyers, in particular.”
She added that MFAA members had said in February 2024 that serviceability was also the number one reason for borrowers being unable to refinance.
“Since then, what we've seen is a number of lenders apply a 1 per cent exception buffer for like-for-like dollar refinancing. Since that original survey, our members have reported something like 56 per cent of our members reported that the 1 per cent buffer made it easier. Therefore, it is a very natural extension that a change in the buffer would allow more first home buyers, in particular, given their circumstances, to enter the market,” the MFAA CEO said.
Building on that, REA Group’s Anthony Waldron told the Senate that he would like to see “a more dynamic serviceability buffer for home loan assessment rates be introduced”.
“The buffer would be wider when interest rates are lower and falling, and narrower when they are higher and nearing the peak of the hiking site,” he explained.
Waldron later concluded: “I think we can all recognize that when we reach the top or near the top of the market, that a 3 per cent buffer is fairly heavy, and we also need to recognize there are perhaps categories of people who are impacted by the buffer in ways that wasn't intended. So for me, it would be first time buyers and those that are trying to move to a better situation.”
The Mortgage Choice CEO continued: “[W]ith interest rates peaking and in the short term/medium term unlikely to reach anywhere close to the 9.6 per cent serviceability buffers are currently assessing borrowers at, it would make sense to have more creditworthy borrowers access to finance they need now.
“So the higher buffer and subsequent rationing of credit has many related repercussions. Most new housing is only built once pre-sales reach a certain milestone, and therefore the 3 per cent buffer in the market is also reducing new housing supply,” he said.
REA Group’s Cameron Kusher added that this was particularly an issue for those developing Greenfield sites and apartments, which are “heavily reliant” on pre-sales from first home buyers.
“By and large, most investors already have equity in the market, so a 3 per cent serviceability buffer does more severely impact on a first time buyer because they haven't got any equity,” Kusher added.
Exceptions for first home buyers
Speaking for the FBAA, regulatory compliance adviser David Carson emphasised the FBAA’s point that changing the current buffer would not threaten credit quality as the lenders already assess borrowers on the ability to repay and have responsible lending obligations.
He elaborated: “Those declared household monthly expenses will be compared against internal benchmarks or external benchmarks, and they may be increased so that the bank will infer that the customer spends more than what they actually do in order to bring them up to a highest level of expenditure. And so you've got financial institutions discounting the income, increasing the expenses of the applicants, and then on top of that, we're applying an additional 3 per cent buffer on their capacity to service.”
According to Carson, this would impact first home buyers harder as they “typically have smaller deposits, and they also have lower income and so those buffers and those discounts bite more deeply into what would be seen as that excess to service the loan”.
“I think that first time buyers need some differential treatment, they should be buffered less, because really it is about the impact of that small increase having a bigger bite of what they've got as surplus to be able to service,” he added, noting that those who are able to service a current loan at a 6 per cent rate should be serviced at a lesser buffer too.
Ello Lending’s Ranin Mendis agreed that first home buyers should have separate treatment, telling the inquiry the 3 per cent buffer rate “disproportionately impacts first home buyers; young borrowers early in their careers are seeing their borrowing power reduce without room for growth.
“A more nuanced approach to regulatory policies, one that differentiates between own occupiers and investors, is essential for enabling greater access to home loans for first time buyers.”
What do you think of the buffer recommendations? Let us know in the comments below!
[Related: Increase stamp duty concessions and decrease buffers, FBAA tells Senate inquiry]
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