NAB to introduce reduced buffers

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 21 July may service at a lower test.

While the level of the buffer has not been detailed, NAB has said lower credit exceptions will be determined on a “case-by-case approach” for eligible customers who cannot meet standard lending criteria.

As with CBA and Westpac exceptions, this will only apply to “like-for-like” refinancers with a good credit history who have a loan-to-value ratio under 80 per cent, those who make principal and interest repayments, and those who refinance no more than their current outstanding loan amount (and cover any bank-related fees up to 1 per cent of the loan value).

NAB added that loan terms may be extended, where appropriate, but standard terms and conditions will continue to apply.

In a note to brokers, a NAB spokesperson said: “With refinancing high on the agenda for many home owners, we will be refreshing our existing approach to support eligible refinance customers switch to NAB, who are considered a good credit risk but may not fully meet standard lending criteria, including serviceability buffers.”

ANZ remains the only major bank not to have announced lower serviceability buffers for refinancing borrowers (and is the only big four bank to have kept its cashback offer). The Adviser has asked ANZ whether it will be introducing a similar policy exception but had not received a response at the time of publication.

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 interest rates rise.

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 and that may push them into hardship.

For example, while borrowers may be able to save thousands of dollars a year by refinancing to a lower rate, they may not be able to do so if they do not pass the serviceability hurdle. As such, they are deemed to be ‘mortgage prisoners’, doomed to pay much higher repayments.

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 per cent serviceability buffer.

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”.

[Related: CBA to offer reduced serviceability buffer]