Home loan bombshell for house hunters

After months of coming under fire for the high serviceability settings on home loan assessments – basically mandating lenders to judge all mortgage applications at interest rates that are three percentage points higher than current levels – the Australian Prudential Regulation Authority (APRA) delivered its verdict.

APRA is refusing to budge from its three percentage points serviceability buffer put in place during the pandemic when interest rates plunged to record lows.

The serviceability buffer was two points a decade ago in 2014, then increased to 2.5 points just before the pandemic when there were rumblings of financial trouble emerging, and then increased further to three points in 2021.

The devastating decision means borrowers and those trying to refinance will be assessed in home loan applications at interest rates that sit around 9-10% in the current market.

Despite Australia emerging strongly from the pandemic, chair John Lonsdale warned that in the past year the risk of financial shocks has persisted and economic uncertainty is shifting.

“Since APRA’s last announcement regarding its macroprudential policy settings in July, inflation has continued to moderate and the risk of higher interest rates has receded somewhat, but we are mindful of potential shocks to household incomes from a slowing labour market,” he said. “That risk is exacerbated by uncertainty in the global economic environment including geopolitical instability.”

“Credit continues to flow to households and businesses and is accessible to good quality borrowers. Although house price growth has eased, prices are still 40% higher than before the pandemic and household debt is high relative to incomes both compared with long-term trends and relative to international peers. This high household debt is a key vulnerability if adverse economic scenarios came to pass.”

Mr Lonsdale said “we also have seen an uptick in non-performing loans, with the potential for further rises, especially if unemployment increases.”

“In light of these considerations, APRA maintains its current macroprudential policy settings. We will continue to closely monitor the external operating environment and will consider modifying these settings should that become appropriate.”

The Australian Banking Association (ABA) has been among those advocating for change, telling the federal Senate Inquiry into Financial Regulatory Framework & Home Ownership in late October that “there are some minor updates that could be made to regulatory guidance that would help more first home buyers safely access credit”.

“Today, APRA requires a 3% serviceability buffer above the loan rate to ensure borrowers can manage higher repayments if rates rise or their circumstances change,” the ABA statement said. “APRA’s buffer could be more flexible for first home buyers, adjusted for a borrower’s circumstances and market conditions. This could give many buyers a leg-up when it comes to purchasing their first home.”

APRA said the decision to keep the settings at 3% came after consideration of ‘high household indebtedness and a pick-up in credit growth, persistent cost-of-living pressures, a weakening jobs market and heightened geopolitical risks”, the APRA statement said.

“Balanced against these risks, APRA noted that bank lending standards remain sound and non-performing loans remain low. As a result of these considerations, APRA has today confirmed that the mortgage serviceability buffer will remain at three percentage points.”

This article first appeared on realestate.com.au and has been republished with permission.