AFG to enable brokers to recommend loans with 1% buffer

According to AFG, mortgage prisoners include customers who are locked into a home loan with a lender at an interest rate that is higher than current available market rates or a borrower who has rolled off a lower fixed interest rate and is now paying a higher variable interest rate.

Currently, the Australian Prudential Regulation Authority (APRA) expects banks to assess a borrower’s capacity to repay a mortgage at a rate 3.0 percentage points above the product rate. (For example, a loan carrying a 5.5 per cent interest rate would therefore be assessed on the ability to make repayments at 8.5 per cent.)

However, AFG has flagged that a modified buffer can be applied under ASIC’s responsible lending guidelines, which state that it may be reasonable to take fewer steps if new financial obligations can reduce a customer’s repayments and improve their financial position.

Given the rising rate environment, there have been growing concerns that borrowers wishing to refinance to a more suitable loan may not be able to, as they would not pass the serviceability buffer.

Several lenders, such as Granite, Liberty and Westpac and its brands* (Bank of Melbourne, St.George Bank and BankSA), have also announced that they will be offering reduced serviceability buffers.

AFG has also announced that it will soon have a lower buffer offering available under its own mortgage line, AFG Home Loans, and has changed its policy to allow brokers to recommend loans based on these lower serviceability buffers, if the customer is classified as a ‘mortgage prisoner’ and has met certain conditions.

These conditions include:

• The borrower must be a new or existing customer who is taking a loan of the same amount over the same remaining loan term.
• The repayments must be lower than the customer is currently paying when comparing like-for-like with their existing mortgage.
• The loan does not require lender’s mortgage insurance.
• The borrower cannot have taken on additional liabilities in the last 12 months (for example, new credit cards or increased credit card limits).
• The borrower must have had no adverse or significant change to income in the last 12 months.
• The borrower must have 12 months of good repayment conduct on existing home loan and other liabilities.
• The borrower must have disclosed and verified income and expenses (including current loans).
• The loan does not require lender’s mortgage insurance.

As such, it said that tens of thousands of ‘mortgage prisoners’ may now be able to refinance their home loans to more affordable interest rates.

AFG’s head of sales and distribution Chris Slater said AFG had developed the new policy to help brokers act in their customers’ best interests, while still meeting responsible lending criteria.

He noted that while APRA’s 3 per cent buffer was appropriate in the past because interest rates were at historic lows and steep increases were inevitable, he added: “Given the significant rises over the past year, a 1 per cent buffer is more appropriate, hence the development of our new policy to help brokers servicing Australians who are trapped in mortgage prison.

“At the heart of this policy is the ability to enable our brokers to facilitate loans with more favourable rates, ultimately saving their customers money and putting them in a better financial situation.

“AFG is committed to creating a fairer financial future for all Australians. By developing this policy our brokers can provide their customers with choice for an appropriate loan product, therefore helping release themselves from the unfair trap of mortgage prison.”

*This story was updated on 26 May 2023 to remove reference to ANZ. ANZ has not made a announcement regarding a change to its serviceability buffer.

[Related:Lenders begin tweaking serviceability buffers]