Relaxing lending rules to help home buyers splits opinion

A potential overhaul of bank lending rules in favour of potential first home buyers has split the big banks and others weighing up the risks of the move on the financial system, despite new analysis suggesting it could lower their interest rates, and help up to 50,000 people enter the property market.

As a senate inquiry looks into financial regulation and the way it affects home ownership levels, investment bank Barrenjoey says loosening the lending rules could let first-time buyers borrow tens of thousands of dollars more than they currently do.

An extra 50,000 first time buyers could get a home if bank regulations were eased in their favour, according to Barrenjoey.Credit: Peter Rae

Barrenjoey, in analysis provided to the Senate inquiry, found that if the Australian Prudential Regulation Authority changed the way banks balanced these risks across their balance sheets in favour of first-time buyers, compared to investors and existing customers, it could reduce rates to new borrowers.

It estimated that easing up on first-home buyers could reduce by 0.3 per cent the interest rate for someone building a home or buying a property off the plan, saving them $37,000 on a $600,000, 30-year mortgage. Someone buying an existing property would get a 0.14 per cent fall in their interest rate, saving about $18,100 in interest.

Barrenjoey founding partner Jonathan Mott said as long as supply could keep up with demand, between 30,000 and 50,000 first-time buyers could enter the market every year.

“We believe, using such a combination of policy suggestions would not only increase the borrowing capacity of first home buyers but would lead to a lower interest rate through the life of the loan,” he said.

However, the nation’s two biggest home lenders, Commonwealth Bank and Westpac, both back the current lending standards set by APRA, including a loan “buffer” that requires banks to assess the ability of all new borrowers to service a loan at an interest rate 3 per cent higher than their original mortgage rate.

CBA told the senate committee that any changes to regulations risked increasing “debt for younger Australians” and could leave them tackling “unsustainable debt and in financial hardship”.

Westpac used its submission to the committee to call for reforms to tackle the “root cause” of the housing shortage to boost the construction of new homes. It said APRA should also adopt a “more flexible approach” to risk tolerance in the property construction sector and give banks more flexibility to lend to property developers to help accelerate house-building.

But ANZ and NAB say APRA’s rules are preventing a host of aspiring home buyers from entering the property market.

ANZ, in its submission to the inquiry, said the existing buffer, along with high house prices, was restricting credit to wealthier households. Meanwhile, National Australia Bank has called for the buffer to be reduced and for student debt to be removed from loan assessment calculations for first-time home buyers.

Housing affordability and homeownership have become a major political battleground as young people become increasingly locked out of the housing market due to record prices and a shortage of properties.

The Coalition launched a Senate inquiry in August. Committee chair and opposition assistant spokesman for home ownership, Andrew Bragg, said letting APRA dictate rules around mortgages was lazy and unimaginative.

Andrew Bragg says APRA had been lazy in its approach to regulations around mortgage standards.Credit: Oscar Colman

“Recalibration of mortgage rules for first home buyers must be on the agenda,” he said.

“It’s one of the only ideas on the housing policy smorgasbord which would have an instant impact for first homebuyers. 50,000 new first homebuyers dwarfs anything Labor has delivered or proposed in their term in office.”

The Barrenjoey analysis does find the changes would raise the borrowing capacity of first-time buyers of between 1 per cent and 3 per cent.

The current average mortgage for a first-time buyer is $500,000. The increase in borrowing capacity is worth between $5000 and $15,000, which could then be used to bid up prices.

Consumer Policy Research Centre chief executive Erin Turner is worried by the suggestion that lending standards should be relaxed to improve access to homes. She said the focus instead should be on making housing more affordable.

“We’re aware that some industry players have put forward ideas I had hoped were long dead, ideas like adjusting responsible lending obligations,” Turner said.

“Properties cost a lot more than people are earning. Solutions can’t be about loading people up with more debt. We have to look at the underlying cost of the asset.”

APRA is staunchly backing the current lending rules, telling the committee in its submission that the 3 per cent buffer on mortgages was “prudent”.

“Shocks could stem from a range of sources, including from rising interest rates, a reduction in borrowers’ income or an increase in their expenses,” it said.

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