In a bid to tackle the persistent challenges of home ownership in Australia, the Senate economics references committee recently concluded its inquiry into the financial regulatory framework and housing accessibility.
With testimony from key players in the banking and broking industries, as well as consumer advocates, the inquiry sought to dissect the effectiveness of current lending regulations, particularly the serviceability buffer, in fostering home ownership.
Hearing the evidence
The inquiry’s final hearings took place over two days (16 and 24 October), with a particular focus on the 3 per cent serviceability buffer set by the Australian Prudential Regulation Authority (APRA) and how lending rules are impacting access to finance.
Chaired by senator Andrew Bragg, the hearings revealed a landscape divided among stakeholders. On one side, members of the mortgage and broking industry advocated more flexible lending criteria, particularly for first-time buyers. On the other side, representatives from major banks expressed caution about loosening regulations.
Is the buffer really an issue?
The current buffer requires banks to assess a borrower’s capacity to repay at a rate 3 per cent higher than the loan’s actual interest rate. While many industry representatives agreed that the concept of a buffer is sound and contributes to market stability, they critiqued its inflexible application.
Anja Pannek, CEO of the Mortgage & Finance Association of Australia (MFAA), says that the existing buffer has become a significant barrier for first-time buyers, but notes that buffer exceptions in other borrowers’ cohorts had made servicing easier.
“What we’ve seen is a number of lenders apply a 1 per cent exception buffer for like-for-like dollar refinancing,” the MFAA CEO says.
“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 case for dynamic buffers
Anthony Waldron, CEO of Mortgage Choice, says that a “more dynamic serviceability buffer” could better reflect market conditions: “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 cycle.
“[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 the finance they need now.”
The sentiment was echoed by Cameron Kusher, executive manager of economic research, at PropTrack, who says it was impacting supply, too. This was particularly an issue for those developing greenfield sites and apartments, he says, which are “heavily reliant” on pre-sales from first home buyers.
“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,” Kusher says.
Differentiated treatment for first home buyers
A recurring theme throughout the inquiry was the need for differentiated treatment for first home buyers. Regulatory compliance adviser, David Carson, from the Finance Brokers Association of Australasia (FBAA) emphasises 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.
“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 says.
Ello Lending’s Ranin Mendis says: “A more nuanced approach to regulatory policies, one that differentiates between owner-occupiers and investors, is essential for enabling greater access to home loans for first-time buyers.”
Bankers split on whether buffers should drop
As the inquiry progressed, major banks were called to testify, bringing forth a range of perspectives. Representatives from NAB and the Australian Banking Association (ABA) indicated a willingness to explore “modest” changes to the serviceability buffer, saying that such adjustments could enhance borrowing capacity for first-time buyers.
The ABA’s chief of policy, Chris Taylor, says: “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.
“Existing regulatory guidance could allow more flexibility for lenders to consider a borrower’s future income growth where it’s prudent to do so.”
NAB also notes “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”.
Conversely, banks like Westpac and the Commonwealth Bank remained defenders of the current buffer. Westpac’s Paul Deall says that loosening standards could exacerbate the financial burden on borrowers: “If we further loosen standards from where [they] are, you will only increase the burden on borrowers and increase their stress.”
APRA says it’s up to the banks
The final hearings also featured testimony from APRA, which reiterated its stance on the appropriateness of the current 3 per cent buffer, but highlighted that lenders are able to utilise exceptions, where appropriate.
Therese McCarthy Hockey, an APRA executive board member, says that the buffer is a crucial element of a broader strategy aimed at ensuring financial system stability. While acknowledging that exceptions to the buffer exist, she says that APRA’s focus is not on solving affordability challenges, but rather on maintaining resilience in the financial system.
However, McCarthy Hockey did reveal a growing trend: the proportion of bank loans with buffer exceptions has increased from around 2 per cent to nearly 5 per cent.
“So we can see that banks are making exceptions, which we expect and support them to do for the right kind of borrower, such that they are in the position to be able to maintain and get their obligation,” McCarthy Hockey says.
“I think it’s important to note that not all first home buyers are alike. Borrowers have discrete features.
“[But] we’re talking about here the overall system stability, the provision of credit – which is holding up – and that banks, who know the customers best, are able to make those judgements, and that flexibility is available and is being used.”
What’s next?
Senator Bragg concluded the inquiry with pointed remarks about the current lending laws, saying that the evidence revealed a “blunt rigidity” in the mortgage rules set by bureaucrats.
He criticised the regulatory approach for being unresponsive to market conditions, saying that the 3 per cent buffer no longer reflects the reality of mortgage serviceability as interest rates fluctuate.
“First home buyers are missing out on loans and are facing reduced borrowing capacity,” he says.
“The serviceability buffer has been unresponsive to market events and monetary policy.
“As we reach the likely top of the tightening cycle, the hypothetical 3 per cent buffer no longer reflects the reality of mortgage serviceability.”
With the hearings concluded, the Senate economics references committee will review the gathered evidence and draft a final report, due by 5 December 2024.
As the lending environment continues to evolve, the push for more flexible serviceability buffers and differentiated treatment for emerging borrowers may pave the way for a more inclusive approach to home ownership. But with interest rates expected to start falling next year, is it all too little, too late?
