The government body has reinforced its confidence in the 3 per cent serviceability buffer, claiming it ensures stability. It seems not many agree, however.
The Australian Prudential Regulation Authority (APRA) recently conducted the final hearings for the inquiry into financial regulatory framework and home ownership on 24 October.
In its remarks, APRA stood by the 3 per cent serviceability buffer, claiming it’s crucial for stability.
“The serviceability buffer currently sits at 3 per cent, and exists to ensure that banks lend to borrowers able to repay their loans in a range of scenarios. The buffer provides an important contingency for a range of economic shocks – not only for rises in interest rates – over the life of the loan. It also factors in unforeseen changes in a borrower’s income or expenses, which we have seen play out recently as cost-of-living pressures mount,” it said.
“All of these policy settings also allow for flexibility – banks are able to make exceptions on a case-by-case basis. This enables the system to remain responsive to the varied needs of borrowers and their individual circumstances without compromising stability.”
For many, sentiments don’t seem to be shared. Leaders in the space said on the current 3 per cent:
• Labor MP Jerome Laxale: “Anyone trying to transition from renting to home ownership should have a bit of flexibility in those buffers. It’s not just first home buyers, it’s renters trying to transition to home ownership who may have previously owned a home before getting divorced or splitting with their partner.”
• Andrew Bragg, the Coalition’s home ownership spokesman: “For too long, APRA has regulated mortgages without a focus on first home buyers. Revising the buffer and risk weights for first home owners would be a practical, equitable and sustainable way to tilt the scales.”
• ABA chief of policy, Chris Taylor: “APRA’s buffer could be more flexible for first home buyers, adjusted for a borrower’s circumstances and market conditions.”
But what about the people who are actually affected by the 3 per cent buffer? Connor McArthur is a concreter throughout the week, servicing the Blue Mountains, west of Sydney. On the weekend, however, he is the owner and builder completing renovations on his property.
Speaking to Broker Daily, McArthur said that young Aussies trying to crack into the property market are the ones suffering.
“The 3 per cent buffer has been a challenge to me as I’m sure it’s been a challenge to all young Australians trying to have a go. In my case I’m undertaking some major renovations as an owner-builder. I’ve owned a home for a number of years now, I have always paid my repayments on time, I make more than enough to cover repayments, but when I went to the bank to fund the final stages of this build they made it near impossible for me to gain any more funds, even after their own financial evaluator came to my property and confirmed that the property is and will be worth more money than they were loaning me,” he said.
“This was all due to the 3 per cent buffer. I had no issues gaining funds for my original home loan on the old buffer and I was in a worse position financially.”
According to McArthur, the buffer needs to be lowered to give young Aussies a better chance at cracking into the property market.
“I do think the buffer needs to be lowered. It is near unachievable for any young Australian to achieve. I do understand that the banks need to cover themselves in these uncertain times and that the economy ‘needs this’ but I think things have gone crazy. I think a more modest 1.5 per cent-2 per cent max buffer would be fairer while still allowing the banks some security,” he said.
“The impact on home ownership is massive. I know this firsthand as I watch a lot of my peers struggle to break into a market. It’s near impossible with the current buffers for a single person to be granted a decent loan purely due to income and this 3 per cent buffer. My sister is trying for a loan for her first home at the moment. She makes a very good wage, has an awesome credit score and has her whole life ahead of her to pay a loan off and the banks won’t offer her anywhere near enough for even a ‘fixer-upper’.”
Banks are somewhat divided on the matter. CBA and Westpac have stood beside APRA, believing the 3 per cent is appropriate. NAB on the other hand understands a lower buffer would be beneficial to home ownership.
There are brokers who are critical of the buffer, too. Ashley Fisher, broker at Hello Funding, said that a buffer is necessary, but too high at 3 per cent.
“I personally don’t agree with a full 3 per cent buffer, as I believe 3 per cent is a little excessive and can make it tough. However, I do agree with a small buffer is needed, especially with the recent multiple rate increases we have had. If there was no buffer in place at the time of their loans being approved more people would have been affected and put in hardship, the buffer is ensuring that you will still be put in a good position if rates do increase in the future,” said Fisher.
“Having a 3 per cent buffer has defiantly made it more challenging when trying to get a loan, as a loan that is at 6 per cent interest rate is being assessed on a 9 per cent rate, it makes it very challenging. Rates were getting higher with 13 cash rate increases starting in 2022 and clients who were struggling to be able to refinance to be on a lower rate to put themselves in a better position, which was very unfair and challenging.”
Sharing similar opinions to McArthur, Fisher believes a more reasonable buffer of 2 per cent would be beneficial.
“I think a 2 per cent buffer is reasonable; to still make servicing a little easier considering rates are higher compared to two years ago but also 2 per cent buffer is safeguarding for future increases,” she said.
“We are already seeing some lenders offering 1 per cent buffers for refinances which is a lifesaver when trying to refinance over for lower rates and I believe this should be across the board with refinances being assessed at 1 per cent. This makes a huge difference in servicing and help us with being able to provide a solution to someone who might be tight on servicing or trying to enter the property market.”
[Related: The broking industry reacts to the 3% buffer hold]
