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Borrowers to feel the pain as APRA holds buffers

by Kate Aubrey13 minute read

The prudential regulator’s decision to uphold the 3 per cent serviceability buffer will continue to challenge borrowers.

The Australian Prudential Regulation Authority (APRA) has decided to maintain the mortgage serviceability buffer at 3 per cent, as noted in its recent annual update on macroprudential policy.

APRA’s decision came in the face of ongoing cost-of-living pressures, both the local and global economic outlooks – particularly the anticipated alleviation in labor market conditions – and the potential rise in borrowing expenses.

Additionally, APRA considered the capital levels on bank balance sheets and the anticipated performance of their lending assets.


In light of these factors, APRA said it will maintain the mortgage serviceability buffer at 3 percentage points to ensure prudent lending standards.

This buffer will remain in place to act as an “important contingency for new borrowers facing the risks of weaker conditions in the labour market”, APRA said.

APRA noted the current level of the buffer has proven to be effective in improving the quality of lending.

In particular, given the rapid increase in borrowing costs over the past 18 months, loan performance has remained sound and arrears rates and non-performing loan rates have increased only marginally and remain low, the prudential regulator highlighted.

The decision was also influenced by persistent high inflation and the likelihood of further increases in borrowing rates.

However, speaking to The Adviser, Gordon MacVicar, a Mortgage Choice broker on the Sunshine Coast, highlighted the significant impact on single individuals attempting to enter the market. Even borrowers with a $100,000 salary find it challenging to enter the market presently.

He explained even a borrower on a $100,000 salary is struggling to enter the market today.

“For them to be able to get back into the market the buffer needs to drop and interest rates need to drop 1–2 per cent as well, Mr MacVicar said.

While the cash rate is expected to hold today (5 December), the five-time increase throughout 2023 has brought the cash rate to 4.35 per cent, with expectations for further hikes in 2024, posing serviceability challenges for many borrowers.

Mr MacVicar has been helping his clients by “resetting expectations”, such as by broadening their property search and ensuring they are realistic in today’s market.

“They might have wanted to purchase a town house in Mount Coolum, for example, but the reality is they can’t purchase there, Mr MacVicar said.

It’s about re-educating and providing property reports and suggestions for other areas that might be more suitable.

He noted that while the buffers pose a challenge for many, he isn’t surprised by APRA’s decision to maintain them, especially considering the recent RBA trend, which suggested no interest rate hikes until ‘at least 2024’.

“As long as the RBA is out there threatening to keep on lifting rates, I think APRA is in a bit of a tricky situation, Mr MacVicar said.

“APRA probably need to see a long period of stability and consistent messaging from the RBA that they are pretty well at the end of the rate cycle.

“If they start dropping the buffer and then the RBA is wrong once again on their inflation forecasts like they’ve consistently been for the past few years, even before COVID-19, it puts everyone in a compromising position.”

Amid the persistently high interest rates and the stringent 3 per cent buffer, multiple lenders have taken steps to lower their lending buffers for qualified borrowers, thereby addressing the hurdle that mortgage holders faced in securing properties.

Mr MacVicar said various lenders lowering their buffers had been helpful for some borrowers.

“That’s really helped things out, but not enough to make housing all of a sudden affordable for everyone,” Mr MacVicar said.

It’s not ‘one size fits all’

The managing director of the Finance Association of Australia, Peter White, emphasised that it doesn’t necessarily have to be a ‘one size fits all’ approach by the regulator.

“I dont believe its broad spectrum either. We know interest rates are one of the big impacts on inflationary pressures, but the buffer should be reduced down for those people who are already in the system with an existing mortgage,” Mr White said.

“If youre already in the system, it doesnt change the dynamics of inflation in that measure, but youre allowing these people to get a better deal and potentially manage the financial stress or hardship.”

He suggests reducing the buffer for borrowers already in the market, where it wouldnt significantly impact inflation, while the current figure might remain appropriate for those entering the market.

“Although Im not a big fan of 3 per cent, 2.5 per cent might be a better measure for people who want to enter the mortgage sector,” Mr White said.

“A whole lot of people out there are suffering with mortgage stress, they need to be looked after.

“People are not doing better, theyre actually doing worse” and the regulators, such as the RBA and APRA are just “not listening to whats going on now”, he added.

APRA holds tight

Despite the serviceability challenges faced by potential borrowers, APRA chair John Lonsdale emphasised that by retaining the current settings, APRA aims to strengthen the resilience of Australia’s banks while upholding stringent lending standards.

“APRA’s macroprudential settings have helped to mitigate risks to the financial system,” Mr Lonsdale said.

“The mortgage serviceability buffer has proved to be effective over the past 18 months; housing loan performance has remained sound while households have had to contend with cost-of-living pressures, including the increase in borrowing costs.

“Consequently, it’s important to note that APRA’s macroprudential settings are dynamic and can be adjusted to address emerging risks when they arise.”

[Related: Feature – Hit the buffers]

gordon macvicar peter white ta skjie


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