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Lowering the serviceability buffer to 2.5 per cent could unlock billions and help 270,000 more people, new FBAA research has found.
Reducing the home loan serviceability buffer by 0.5 per cent could boost total borrowing capacity by $276 billion, according to the Finance Brokers Association of Australia (FBAA).
The broker association commissioned research consultancy CoreData to analyse the impact of reducing the buffer that banks need to apply under prudential standards.
It found that around 270,000 more people could access median home loans if the serviceability buffer rate was cut from its current rate of 3 per cent to 2.5 per cent.
Nearly 400,000 first-time home buyers aged 25–34 would benefit, with those using a 5 per cent deposit seeing the greatest access gains for loans under $900,000.
Most beneficiaries of the buffer rate reduction would be aged 25–34, helping more first home buyers – nearly 40 per cent of whom are currently blocked by serviceability rules, according to the FBAA – enter the market.
The reforms would increase borrowing capacity by 5 per cent, boosting demand for lending that in turn would relieve loan stress, the FBAA said (although noting any uptick in demand could further raise house prices).
The reduced buffer may also ease loan stress among mortgage holders, as more would be freed up to refinance, thereby freeing ‘mortgage prisoners’ locked into higher rates.
FBAA managing director Peter White urged both major political parties to make a pre-election commitment to reduce the rate, saying that the Coalition had already done so.
“We’ve said for a very long time that this simple move would make a massive difference to the housing market because we are talking about people who can afford to service these loans,” he said.
Both the FBAA and the Mortgage & Finance Association of Australia (MFAA) have long campaigned for a buffer reduction.
White said the research confirmed that the reduced buffer may “ease loan stress among current mortgage holders ... as more are freed up to refinance.”
“This will, as we have stated before, free mortgage prisoners who are locked into higher rates unable to refinance due to the serviceability rate,” White said.
While White acknowledged that the research found the move could unintentionally drive up property values, he said it was generally thought among economists that the commitments made by both sides of politics to boost the housing market would do this already.
“Any initiative to make housing more accessible has the potential to result in property values increasing due to supply and demand, but the bottom line is that this is a very effective way to help hundreds of thousands of people enter the market, and remain in the market,” White said.
He said that the FBAA had given the research to both the government and opposition, noting the upcoming federal election on Saturday.
“We’d also like to see the government of the day regularly review the buffer rate so it remains relevant, fit for purpose and suits the state of the economy at any given time,” he said.
To date, the Coalition has committed to working with regulators to change lending rules to help young Australians access a mortgage (including reducing the ‘overly cautious’ serviceability buffer).
Although Labor has not vowed to reform the buffer as part of its election promises, in February, the party instructed regulators to update their guidance regarding the way student debt was treated by lenders in an effort to boost serviceability.
Last year, the Senate economics references committee also called for the Australian Prudential Regulation Authority (APRA) to reduce the serviceability buffer for first home buyers in its final report from the inquiry into Australia’s financial regulatory framework and home ownership.
[Related: Coalition confirms commitment to reduce serviceability buffer]
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