The Australian Prudential Regulation Authority (APRA) has declined to loosen its current serviceability buffer for home loans despite pressure from the banks to do so.
APRA published an update on its macroprudential policy settings this week, including the reasons for keeping the current test – which assesses a borrower’s ability to repay their loan at rates 3 per cent above current levels – in place.
This included the fact that “heightened risks to serviceability remain”.
These risks included high inflation and the prospect that the RBA would continue to increase interest rates.
The update comes after many lenders voiced concerns that the current buffer was too restrictive, explained PropTrack Senior Economist Paul Ryan.
“Many lenders believe this buffer setting is too restrictive for buyers and have called for it to be reduced,” he said.
“It is constraining many buyers and making it difficult for first-home buyers in particular.”
Mr Ryan said that in the current lending environment, many borrowers would be being assessed against their ability to pay a loan at an interest rate of 8 per cent or more.
“The 3 per cent mortgage serviceability buffer means owner-occupiers currently applying for loans with interest rates above 5 per cent must show they can make repayments if interest rates rise to over 8 per cent,” he said.
Investors need to be able to meet repayments above 9 per cent.
Mr Ryan said if APRA were to lower the buffer even slightly it would result in a significant boost to borrowing capacity.
“Reducing the buffer to 2.5 per cent – the level it was at in late 2021 – would increase borrowing capacities by around 5 per cent,” he said.
CoreLogic Head of Research, Eliza Owen, said APRA’s decision was unsurprising given current economic volatility.
“I think it makes sense in the context of high levels of uncertainty,” she said.
“We’ve recently seen a rebound in inflation pressures in Europe, for example, and up until fairly recently we were optimistic Australia was passing a peak.”
Despite fears that the lending buffer would prevent existing borrowers from refinancing.
“I don’t think it’s something that creates large scale mortgage imprisonment especially when you consider a lot of people have built up equity,” Ms Owen said.
For new borrowers, high interest rates rather than serviceability tests were the major issue, she said.
“I think the rising rate situation for them was always going to make a big difference,” she said.
While APRA had declined to change the test for now, there was nothing to say they couldn’t alter it in the future when there are signs of greater stability.
“They (APRA) would probably be looking for more definitive, data-driven signs that we’ve passed a peak in inflation,” Ms Owen said.
She said it was important to keep in mind APRA’s reasons for strengthening the serviceability test.
“At the end of the day APRA is concerned with prudential measures in the credit environment and have used macroprudential changes to target areas of risky lending,” she said.
“If we hadn’t seen this buffer implemented in 2021 it’s likely we would have seen more people falling behind on their mortgage repayments at the moment, because they potentially would have been taking out more debt than they could service.”
It was also important to keep in mind that at the time APRA increased the buffer, many banks had their own “lending floor measures in place, some of which were higher than APRAs buffer”, Ms Owen said.
