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Australia’s prudential regulator has announced that the mortgage serviceability buffer would remain unchanged.
According to the Australian Prudential Regulation Authority (APRA), the current 3 per cent mortgage serviceability buffer has not been restrictive new credit to the household sector.
A variety of reasons were cited influencing this decision, such as high levels of household debt and above average total credit growth, which APRA anticipates will rise in response to interest rate decreases.
The lower inflation figures and falling interest rates have mitigated some of the financial strain experience by borrowers, highlighting a need for tighter regulation, said APRA.
Bank lending standards also remain in good shape and the portion of non-performing loans is low.
However, APRA will be working with regulators to implement tools to manage lending risks. This includes the serviceability buffer, as well as limits on new high debt-to-income lending, or limits on new investor or interest-only loans.
APRA chair John Lonsdale said the flow of credit to various borrower segments means the regulator didn’t feel the need to lower the buffer right now.
However, if interest rates drop substantially while labour markets stay strong, history shows this can drive increased credit growth and leverage, push up housing prices, and often lead to riskier lending practices, such as high debt-to-income loans and expanded investor lending, he said.
Regulators are monitoring these trends. Lonsdale noted that high household debt has the potential to majorly impact the financial system, which is especially pronounced in Australia as it has more exposure to residential mortgages than any other country.
He said that looking to the future, lenders must be prepared to address risks to financial stability.
APRA said the countercyclical capital buffer will stay at its default level of 1 per cent of risk-weighted assets.
For some time there have been calls to lower the serviceability buffer. Reports from earlier in the year claimed that a 2.5 per cent buffer would unlock homes for 250,000 more borrowers.
The Coalition announced that it would reduce the buffer to 2.5 per cent if elected.
APRA has kept the serviceability buffer at 3 per cent since it increased it from 2.5 per cent in October 2021 – at the height of the pandemic.
Since then, borrowers and brokers alike have been vocal in their desire to see the buffer reduced, with many labelling it restrictive at its current rate.
This article was first published on REB's sister publication, Broker Daily.
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