AFG launches reduced buffer home loan

While the prudential regulator requires banks to apply a 3 percentage point buffer on top of the product rate when establishing whether customers can service a mortgage, AFG Home Loans has this week introduced a product that enables eligible customers of AFG brokers to service at 1 per cent.

The loan, funded by AFG Securities, applies to dollar-for-dollar refinances for borrowers who have 12 months of good repayment history, who have had no significant change to their income in the last 12 months, and who are seeking $1.5 million or less with a loan-to-value ratio of 80 per cent. Its floor rate is 6.05 per cent.

AFG Home Loans Retro Switch is available on a principal and interest and interest-only payment.

Damian Percy, the general manager of AFG Securities, said the product was providing an option for borrowers to improve their financial situation and was consistent with AFG’s purpose of ‘creating a fairer financial future for all Australians’.

He said: “A 3 per cent serviceability buffer was appropriate when interest rates were at a record low. It was inevitable that interest rates would substantially rise at some point, and therefore a higher serviceability buffer was appropriate to test that borrowers could meet higher repayments under this scenario.

“But following 12 rate hikes by the Reserve Bank of Australia since May 2022, variable rate repayments have substantially increased and the ceiling is much closer. A 1 per cent serviceability buffer is a fairer level that achieves a balance between responsible lending and may help borrowers free up cash flow and improve their financial situation.”

Several lenders have been creating exceptions to enable borrowers to service at a lower rate recently amid an increase in ‘mortgage prisoners’ (borrowers who are unable to refinance as they cannot pass serviceability tests).

For example, borrowers who may want to take out a variable-rate bank loan of around 6 per cent are currently being 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.

As such, many lenders – including NAB, CBA and Westpac – have been tweaking their buffers in the past few months to help more borrowers refinance.

[Related: NAB to introduce reduced buffers]