APRA holds firm on lending buffer as banks aim to approve 7pc of ’mortgage prisoner’ refinancings

The banking regulator says lenders can make exceptions on refinancing for ‘mortgage prisoners’ but still sees 3 per cent as an appropriate serviceability buffer.

Australia’s banks are aiming to approve 7 per cent of refinancings from so-called “mortgage prisoners” who do not meet the banking regulator’s serviceability buffer, the regulator told politicians on Wednesday.

Under an exception to the requirement already, about three per cent of new loans are being granted to customers that don’t meet the regulator’s serviceability test.

“Conversations with the banks over recent weeks is that for refinances … the appetite is around 6 to 7 per cent of the flow would go up to have an exception,” Australian Prudential Regulation Authority banking supervision director Renée Roberts told a senate estimates hearing.

“So we we’d like to see that it stays there and we will monitor that closely,” she added.

APRA chair John Lonsdale said those approvals were only exceptions and the regulator’s view remained that a requirement to test borrowers’ repayment capacity against a rate 3 percentage points above the actual loan rate was appropriate.

“It’s an exception, it’s not a new rule,” he said. “To make sure that we do not have creep on the exceptions … we will provide a reminder to our regulated entities through maybe a letter soon, just really reiterating not a new policy, but what is existing policy and what we expect.

“We think 3 per cent is the right number,” Mr Lonsdale said, pointing to inflationary pressures amid a weakening global economy, and a local labour market that is expected to weaken in the next 18 months.

“All of that suggests that we should have a prudent serviceability buffer and so that’s why we think the 3 per cent fits.

“But if (banks) look at (customers’) track record of payments (and) they are a good borrower, then they can lend to them, we have an exception policy under the standard that allows the banks to lend to those people and … it is being used by about probably 2 to 3 per cent of loans written,” Mr Londsdale said.

“We don’t want that to overshadow the serviceability buffer because there’s an important reason why it’s 3 per cent, but if there’s a good borrower, banks can write that loan, so that’s up to the banks.”

He said APRA’s serviceability test was not “unduly” impeding borrowers’ ability to switch banks, with about one per cent of total loans changing provider, which was the highest level in 20 years.

The regulator has been facing calls to relax the serviceability buffer in the face of concerns the current rules were causing a funding crunch for new borrowing.

Lenders have warned that borrowers who were assessed for loans at older rates, written when the cash rate was hovering at 0.1 per cent, now face a far higher rates environment. The Reserve Bank has increased rates 11 times, taking the cash rate from its low of 0.1 per cent in April last year to 3.85 per cent.

The central bank will meet next week to decide whether to raise rates again to rein in high inflation, even as RBA chair Philip Lowe told the same senate hearing on Wednesday that “Australians will be devoting a higher share of their income to mortgage payments than ever before”.

According to the Reserve Bank of Australia, mortgage payments accounted for 8.9 per cent of household disposable income at the end of March, and that is set to increase as more borrowers with fixed-rate loans continue to roll off onto higher rates.

Earlier this month, National Australia Bank said two in five of its customers who bought homes over the three years to July 2022 were likely locked into loans they cannot refinance.