CBA to offer reduced serviceability buffer

As of this Friday (23 June), an alternate interest rate serviceability buffer will apply to eligible refinancing applications.

Instead of needing to pass a buffer that is 3 percentage points higher than the product rate (as per the prudential regulator’s expectations), eligible applications received from this date will be able to pass servicing on the higher of alternative buffer rate of 1 per cent or the floor rate of 5.4 per cent.

The alternative serviceability interest rate buffer can apply if:

• The loan being refinanced has been open for a minimum of 12 months.
• The amount to be refinanced is no greater than the existing loan plus the higher of notional $10,000 or 1 per cent of the amount being refinanced to cover fees and/or payout of existing loan/payment cycle.
• The loan has a loan-to-value ratio (LVR) equal to or less than 80 per cent (and no LMI).
• The borrower has not had any delinquencies on CBA or other financial institution products for the last 12 months.
• The applicant passes full income, expense, and liability verification.

Not all loan types and scenarios will be eligible, however, with CBA flagging that the following are excluded:

• Guarantor/property share scenarios
• Bridging loans
• Construction loans
• Loans involving any Government Guarantee Schemes
• Debt consolidation of unsecured debt
• Additional top-ups or cash out for any purposed outside the refinanced loan(s)

Speaking of the change, Michael Baumann, the executive general manager, home buying, said: “We know that due to the current interest rate environment some home owners are facing challenges refinancing their home loans so we are introducing an alternate interest rate serviceability buffer of 1 per cent for select customers who meet strict eligibility criteria.

“The alternative interest rate buffer servicing assessment rate of 1 per cent will support customers refinancing existing home loan debts which do not pass the standard 3 per cent buffer over a 30-year period Principal and Interest loan, but who would otherwise be eligible to refinance to a CommBank home loan.”

Mr Baumann flagged that the bank offers “a wide range of flexible home loans with competitive rates”.

“We encourage customers who are considering refinancing to connect with a CBA lender or broker, or to message us in the CommBank app to be connected with a specialist, who can help them find a home loan that best meets their needs,” he concluded.

Why are lenders reducing their buffers?

In February of this year, the Australian Prudential Regulation Authority (APRA) announced that the current 3 per cent buffer was “appropriate” and would not be tweaked, despite some calls for it to be reduced as serviceability tightens and borrowers look to refinance in record numbers.

As such, borrowers who may want to take out a variable rate loan of around 6 per cent, for example, would be assessed on the basis of being able to afford repayments at 9 per cent.

Several industry participants — including brokers, lenders, association heads, and politicians — have warned that this serviceability test is too high and is resulting in borrowers being ‘stuck’ in mortgages that might not be in their best interests.

Indeed, according to the most recent Broker Pulse survey, conducted by Momentum Intelligence between 1 and 15 June 2023, 96 per cent of brokers said that they had at least one client who had not been able to refinance or get a loan because they could not pass the 3.0 per cent serviceability buffer.

However, as more lenders have begun accepting serviceability exceptions, more broker clients are finding solutions. According to recent data from mortgage brokerage group Lendi Group, three in 10 ‘mortgage prisoners’ (mortgagors who have been unable to refinance as they don’t pass serviceability tests) may now be able to refinance under these reduced buffers.

The growing number of lenders who have moved to reduce buffers for certain borrowers has caught the eye of the prudential regulator, though, with the chair of the Australian Prudential Regulation Authority (APRA), John Lonsdale, recently writing to banks to remind them of the regulator’s expectations when it comes to managing exceptions to housing lending policy.

He warned that any banks reporting large volumes of policy exceptions will be subject to “heightened supervisory attention”.

CBA has confirmed that the decision to introduce its alternate serviceability buffer was made in consultation with APRA and followed further clarification and guidance from the regulator.

[Related: Nearly all brokers have mortgage prisoner clients: Broker Pulse]