APRA buffer ‘unfair trap’ for mortgagors, CEO says

Ryan Gair has referred to the Australian Prudential and Regulation Authority’s (APRA) 2.5–3 per cent serviceability buffer as an “unfair trap” for mortgagees who are looking to refinance, particularly on a dollar-for-dollar refinancing as approximately $141 billion in fixed-rate home loans are expected to expire in the next few months.

According to the CEO, the removal of the buffer would put consumers in a better financial position in the long term, while recognising that existing borrowers have already proven their ability to service loans and allowing them to save by refinancing to a loan with a lower rate.

“The significant savings would see them pocket more cash over time,” he said.

“Home loan buffers made sense during the last few years when we had record-low interest rates. They acted as a contingency for lenders to ensure borrowers could repay their loan.

“APRA should have separate recommendations to regulate existing borrowers: they should allow those looking to refinance to simply show that they can meet the repayments along the same lines as applying for a new loan, and that your current income can still service the repayments.”

The potential ramifications of APRA opting not to remove the buffer would result in a lack of flexibility for borrowers to change lenders, which is crucial for a healthy finance sector, according to Mr Gair.

“It prevents complacency and promotes competition and innovation, and it ensures that as needs change, you can find a more appropriate loan product,” he added.

As to what brokers could be doing to help their clients in regard to the buffer, Mr Gair suggested that brokers should speak to their clients about consolidating debts should they want to refinance, as this will “usually increase serviceability”.

He continued: “They also want to explain that paying these debts off as soon as possible is key as you don’t want your car loan to be paid off over a 30-year term over the life of your home loan.

“Some other advice I would be providing clients is to cut back on any debts or credit card limits that you do not use; reducing your credit card limits will increase your borrowing capacity.”

Earlier this year, the Finance Brokers Association of Australia (FBAA) slammed APRA’s decision to keep the mortgage buffer at 3 per cent, claiming it would create more mortgage prisoners.

FBAA managing director Peter White AM said at the time that the buffer means that many borrowers who can afford the interest rate of the day, or even a little higher, are being unfairly prevented from refinancing.

“More borrowers are becoming ‘mortgage prisoners’, locked into a situation where they can’t access a better deal because they don’t meet the inflated assessment rate,” Mr White said.

Written by Adrian Suljanovic

Last Updated: 04 May 2023

Published: 01 May 2023