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The banking industry association has told the Senate home ownership inquiry it believes APRA’s 3 per cent serviceability buffer should be more flexible.
The Senate inquiry into the financial regulatory framework and home ownership – run by the economics references committee – is holding its second round of hearings on Thursday (24 October), where members of the banking industry are being called to present evidence and elaborate further on their submissions.
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Among the witnesses called are three of the four major banks (CBA, NAB, and Westpac) and the Australian Banking Association (ABA).
Picking up a line of questioning from the first round of hearings last week (which heard from members of the broking community), the chair of the committee, Andrew Bragg, asked the ABA whether it thought reducing the serviceability buffer from its current level of 3 per cent would benefit first home buyers and other borrowers.
Indeed, Bragg has previously said that evidence has suggested “the serviceability buffer is a blunt tool that can lock people into mortgage prisons.”
While the banks already have discretionary powers to drop the 3 per cent buffer to 1 per cent in certain circumstances (typically for like-for-like refinances under 80 per cent loan-to-value ratio), there are growing calls to carve out exceptions for first home buyers, too.
Speaking on behalf of the ABA, policy director Craig Evans and chief of policy, Chris Taylor, said that they supported “further conversation” on tweaking the APRA buffer for first home buyers, echoing calls to do so by several members of the broking community.
“There are some minor updates that could be considered to regulatory guidance that would help more first home buyers safely access credit today,” the chief of policy said.
“APRA requires a 3 per cent serviceability buffer above the loan rate to ensure borrowers can manage higher repayments if rates rise or their circumstances change, APRA’s buffer could be more flexible for first home buyers, adjusted for a borrower’s circumstances and for market conditions.
“This could give more buyers a ‘leg up’ when it comes to purchasing their first home.”
The ABA also suggested that responsible lending obligations (RLOs) could be adjusted, too.
While Taylor said they “fully support” RLOs, there was room for adjustment.
“Current obligations for assessing a first home buyer's serviceability do not account for their strong income growth potential, compared to other borrowers,” he said.
“First home buyers are assessed on their ability to repay a 30-year loan based, essentially, on their first year of income.
“Existing regulatory guidance could allow more flexibility for lenders to consider a borrower’s future income growth where it’s prudent to do so.”
Taylor said, however, that supply was still the main issue that would improve home ownership and access.
He said: “There is no silver bullet to address the housing affordability crisis but increasing housing supply and sensibly balancing policy and regulatory measures to improve credit could help in making home ownership a reality for more Australians.”
Taylor said that the housing access issue would be “best addressed in the long run by increasing supply, and particularly of affordable homes in the areas where people live and work”.
“And while there is a role to play in reviewing policy settings, we note there is an ability to provide exceptions to APRA requirements and APRA does enable exceptions where it’s managed prudently and in a limited way,” he said.
“As prices have increased, this is an area we might need to continue to review and make sure it remains appropriate moving forward.”
Tweaking buffer no silver bullet: NAB
Representatives from National Australia Bank (NAB) also appeared before the Senate inquiry, where they were questioned about the impact of changes to the serviceability buffer.
While supporting “modest” tweaks to the buffer, Andy Kerr, NAB executive for home ownership, and Ben Nicholls, NAB executive portfolio management, said any change would require the close consideration of other credit risk elements to ensure it’s done safely.
“We think the buffer is an important mechanism to protect for changes in interest rate over time, and the rapid rises recently, that we’ve seen over the last couple of years, are a good reflection as to why the buffer is in place and why it’s important,” Kerr said.
“In our submission, we do see an opportunity to work with regulators and government in a targeted way to see modest changes in the buffer for first-home buyers, which would provide modest increases in borrowing power for first-home buyers versus the broader population.”
Kerr said changing policy on the demand side without addressing underlying housing supply problems could exacerbate the problem.
He noted decreasing the serviceability buffer for first-home buyers – therefore increasing their borrowing power – could improve their ability to compete for housing in an area they want to live in but noted these changes would only have a minimal impact.
“We wouldn’t see changes in the buffer as a silver bullet, but there is a modest opportunity there,” he added.
Westpac and CBA also both fronted the hearings on Thursday, however neither backed changing the buffers. Instead, they argued the buffer was necessary to prevent inappropriate lending and overburdening first home buyers.
Speaking for the bank, Westpac’s head of risk, mortgages, Paul Deall, said: “If we further loosen standards from where [they] are, you will only increase the burden on borrowers and increase their stress.”
[Related: Mortgage rules hurting first home buyers: Senator Bragg]
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