Association heads flag downside risks of buffer changes

In a letter to authorised deposit-taking institutions (ADIs), APRA told lenders it expects they will 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.

Currently, most banks use a buffer of 2.5 percentage points.

The increase in the interest rate buffer applies to all new borrowers.

It is estimated that the 50 basis points increase in the serviceability buffer would reduce maximum borrowing capacity for the typical borrower by around 5 per cent. 

Speaking of the changes, the leaders of the Finance Brokers Association of Australia (FBAA) and the Mortgage & Finance Association of Australia (MFAA) both noted that while the reforms were more welcome than debt-to-income limits (which was rumoured to have been on the cards), there were still some downside risks with raising the buffers, too.

Both FBAA managing director Peter White and MFAA chief executive Mike Felton told The Adviser that there could be implications for those trying to refinance under higher serviceability hurdles.

“My primary concern is existing borrowers becoming ‘mortgage prisoners’ to their existing banks if the floor rates move too far away from the actual interest rates being paid – this happened in the recent past,” Mr White told The Adviser.

“This could risk stalling the refinance and renovation markets as lenders would constrain existing mortgage holders as a captive, even though they can afford their home loan.”

Mr White also flagged that it could impact extra borrowings or enabling borrowers to move to another lender as the higher servicing/floor rates could mean “they do not qualify and therefore are captives to where they are/with what they have”.

“This a bad outcome being risked, based on history of when this has actually happened [in the past],” he said.

“Any measures to curb the boom must have a clear rationale, otherwise there’s a risk of a housing recession. 

“So we oppose higher floor rates if there are no accompanying measures to ensure borrowers can refinance.”

MFAA CEO Mr Felton noted that a key challenge in deciding prudential measure settings such as these was “how to prevent consumers from over-committing themselves in the current market conditions, while also remaining mindful of the difficulty first home buyers face in gaining a foothold in the market”.

“An obvious downside of an increase in the serviceability buffer is that it affects the borrowing capacity of all borrowers, including first home buyers, and can also clearly impact a consumer’s ability to refinance despite having perfect credit,” he said.

The MFAA CEO told The Adviser that as the increase in the serviceability buffer “inevitably raises uncertainty regarding pre-approvals and applications that are in progress”, the association is “currently speaking with lenders to clarify their positions”.

He added: “We do, however, note that APRA appears to be providing a period of grace to ADI’s with the following statement in their communications: ‘Where ADIs continue to approve loans using a lower buffer rate beyond the end of October 2021, APRA will adjust individual prudential capital requirements to reflect higher credit risk inherent in new lending.’”

However, the MFAA suggested that the change does also have the benefit of “looking at the full borrower picture and is likely to give better recognition to those with well-controlled expenditure than an APRA implemented debt-to-income ratio would have done”.

Mr Felton concluded: “Although changes such as these are never easy to accommodate, consumers who use the services of a mortgage broker will continue to benefit from an unrivalled Best Interests Duty in the credit assistance they receive, regardless of changes to lender credit policies and the prudential measures those policies reflect.”

[Related: Banks to raise serviceability buffers]