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‘Mortgage buffers’ will protect households from rate rises: Treasurer

holding a house

holding a house
Reporter 3 minute read

Treasurer Scott Morrison has said that interest rates are “obviously” going to rise in the future but that many home owners would be able to avoid mortgage stress thanks to “mortgage buffers”. 

Speaking on Paul Murray Live on Sky News on Wednesday (6 September), Treasurer Scott Morrison was asked about "mortgage stress".

Mr Murray said: "[W]e know mortgage stress is a very significant issue for an awful lot of Australians [and] rates have never been lower.... How big of a concern to you is it that the downside of growth is that (at some point) interest rates go up and there’s an awful lot of people who, as they say, have no margin to move within?"

In response, Mr Morrison stated that while rates "are obviously more likely to go [up] than down", there would “obviously” be an interest rate “event” coming “at some point”.

However, he added that this scenario would not necessarily lead to mortgage stress.

Mr Morrison said: “[T]he sort of scenario you’re forecasting is one where the economy has improved; wages [are] improving, unemployment is going down, so there’s a lot of compensating factors to that. The other thing about the housing market, particularly housing debt, is [that] in the main, many Australians have been getting ahead of their mortgage, so there’s a reserve capacity to draw on their mortgages and this is demonstrated in numbers from the Reserve Bank and the banks themselves.

"Australians have taken the opportunity, in the main, to try and get ahead of their mortgages and that’s a good thing. So, they’ve built a bit of a buffer for that type of event taking place (and at some point, obviously, that’s going to happen), but Australians have been pretty prudent."

The Treasurer continued: "But the things that they can’t control are things like interest rates ... electricity prices, and that’s why we have to do everything within our power to put downward pressure on them.”

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Mr Morrison’s comments follow on from the Reserve Bank of Australia’s decision to hold the cash rate at its record low level of 1.5 per cent for the 13 month in a row and amid growing scrutiny and regulation on interest-only lending

Speaking at the Reserve Bank board dinner held on Tuesday (5 September), RBA governor Philip Lowe said: [T]he RBA has worked closely with APRA to ensure that lending practices remain sound. Rightly, APRA has had a strong focus on loan serviceability calculations. 

“In some cases, loans were being made where the borrower had only the slimmest of spare income. APRA has also introduced restrictions on growth of investor loans and restrictions on interest-only lending. This has been the right thing to do.” 

Mortgage brokers are also increasingly being asked to provide detailed reasoning as to why they are placing a mortgagor into an interest-only loan and ensure that consumers can afford their repayments. 

Many of those in the industry have outlined that mortgagors on interest-only loans should have a buffer of between 2 per cent and 3 per cent to protect against rate rises.

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For example, CBA CEO Ian Narev stated at the Aussie conference last month that “the nature of regulation is such that [in] the low interest rate environment there is a buffer to make sure that if interest rates go up, you can still service that loan”. 

Noting that the buffer is about 2.5 per cent currently, Mr Narev added that brokers "obviously have to be careful never to stray into financial advice”, stating that the conversation brokers need to have with customers is: “If rates go up — and we know from the test that you are going to be able to afford it — but what are you going to need to stop in order to repay, assuming your wages aren’t going up? And is everyone comfortable with the levels of debt?” 

He said: “If the people in this room [i.e., brokers] and the people in the banking system are doing the right thing by the customers, if they are thinking about the long term and having the conversations with the customers to make sure that [if] rates could go up, they will be comfortable, then the lender is going to do it.”

Likewise, Digital Finance Analytics principal Martin North has previously told The Adviser that both brokers and banks have obligations to ensure that there is “detailed analysis” of household expenditure to maintain a 2–3 per cent buffer. 

[Related: Low interest rates to remain ‘for years to come’]

‘Mortgage buffers’ will protect households from rate rises: Treasurer
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