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Interest rate ‘buffer’ should be reassessed: FBAA

by Fabian Cotter12 minute read

APRA's decision to keep the loan buffer at 3 per cent is making it even harder for mortgagors refinancing, the industry association has warned.

Maintaining the 3 per cent loan serviceability buffer is creating more ‘mortgage prisoners’, the Finance Brokers Association of Australia (FBAA) has cautioned.

On Monday (27 February), the Australian Prudential Regulation Authority (APRA) announced that the current 3 per cent buffer was “appropriate” and would not be tweaked at the moment, despite some calls for it to be reduced as serviceabilty reduces.

Currently, APRA expects banks to assess new borrowers’ ability to meet their loan repayments at an interest rate that is at least 3.0 percentage points above the loan product rate. The buffer was previously 2.5 per cent, but was raised in 2021 after APRA flagged growing financial stability risks amid a surge in mortgage lending and record-low interest rates.


As such, borrowers who may want to take out a variable rate loan of around 5.0 per cent, for example, would be assessed on the basis of them being able to afford repayments at 8.0 per cent.

Following the announcement that the buffer will not be changed, the Finance Brokers Association of Australia (FBAA) has called on the regulator to reassess its decision.

It explained that continuing with a 3 per cent loan serviceability buffer for mortgages as interest rates rise makes it “even harder for mortgage holders” to refinance and negotiate a better rate.

FBAA managing director Peter White AM said 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, he said.

“Others may be forced into selling their homes because the excessive buffer rate holds them prisoner to their current lender as rates rise. 

“A 3 per cent buffer was appropriate in the past because interest rates were at an all-time low and were always going to rise significantly, and this protected both the banks and the borrowers, but we can’t live in the past and a buffer of 1.5–2 per cent is far more appropriate today and in the near future.”

Rates should have been ‘managed better’

The finance association questioned whether the regulator was potentially “signalling to the market that there is another 3 per cent rise to come” because “there is no other reason to keep borrowers captive,” it explained.

Mr White said it wasn’t the fault of Australian consumers that interest rates have jumped so quickly, but they are the ones being penalised.

“It’s time borrowers stopped paying the price for the rapid rise of rates,” he said.

“The FBAA was predicting the rise well before the RBA acted, but at the time many didn’t believe us.

“Rates should have been managed better and raised in smaller increments over a longer time period.”

Mr White has called on APRA to reassess the buffer rate on a regular basis “but not less than every two years to ensure they are fit for purpose in the market they are representing now and in the near future.”

Buffer ‘appropriate’ even as conditions worsen

When releasing its assessment of its macroprudential policies earlier this week, APRA concluded the 3.0 per cent loan serviceability buffer and existing macroprudential policy settings were “appropriate” as “domestic and global economic conditions deteriorate.”

The assessment — which included reviewing the 1.0 per cent neutral level for the countercyclical capital buffer and 3.0 per cent loan serviceability buffer — did not put forward any immediate changes to the operative settings but suggested they may be tweaked in future if necessary.

However, members of industry have largely backed a reduction in the serviceability buffer.

In a poll on Mortgage Business, 65.7 per cent of respondents said they were in favour of a reduction of the buffer and 70 per cent of brokers have previously suggested that the 3 per cent buffer would address the country's house price issue.

Further calls for a buffer rate drop

PropTrack senior economist Paul Ryan commented: “On Monday APRA released an assessment of its macroprudential policy settings, leaving them unchanged.”

“The most important policy settings for home buyers is the mortgage serviceability buffer, which remained at 3 per cent.

“The 3 per cent mortgage serviceability buffer means owner-occupiers currently applying for loans with interest rates above 5 per cent must show they can make repayments if interest rates rise to over 8 per cent. Investors must be able to meet repayments above 9 per cent.

“Many lenders believe this buffer setting is too restrictive for buyers and have called for it to be reduced. It is constraining many buyers and making it difficult for first-home buyers in particular,” Mr Ryan outlined.

“Reducing the buffer to 2.5 per cent - the level it was at in late 2021 – would increase borrowing capacities by around 5 per cent.

“APRA – in consultation with the Council of Financial Regulators, which includes the RBA – has deemed these settings appropriate for now, but will continue to watch market conditions, including housing prices, in future assessments,” he added.

[Related: APRA says 3% loan buffer is still ‘appropriate’]

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