APRA maintains 3 per cent loan ceiling, warns of tougher economic times to come

Mortgage borrowers will be bound by the same strict borrowing ­assessments after the prudential regulator announced on Monday it would not change its budgeting rules.

Mortgage borrowers will be bound by the same strict borrowing ­assessments after the prudential regulator announced on Monday it would not change its budgeting rules.

Lenders are required to assess any new borrowing or refinancing at 3 per cent above the product rate to ensure borrowers can meet higher payment burdens.

The Australian Prudential Regulation Authority had faced calls to relax the serviceability buffer in the face of concerns the current rules were causing a funding crunch for new borrowing and blocking existing loan holders from exiting uncompetitive contracts and refinancing.

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 nine times, taking the cash rate from its low of 0.1 per cent in April last year to 3.35 per cent.

Many market watchers expect the RBA to again raise the cash rate, with Westpac lifting its expectations to 4.1 per cent on the back of sustained inflation.

APRA chair John Lonsdale. Picture: Chris Pavlich

In a 14-page update to its macroprudential policy settings, APRA said the existing settings “remain appropriate in the current risk environment”.

APRA chairman John Lonsdale said maintaining the serviceability buffer was prudent given the potential for further rate rises and a potential deterioration in the economy.

“There is a high degree of uncertainty in the outlook. On the one hand, there are signs of a deterioration in conditions, including falling asset prices and the potential for pockets of stress,” Mr Lonsdale wrote.

“On the other hand, lending standards are broadly sound, loan arrears remain low and the banking system is well capitalised.”

But the banking regulator signalled it would “continue to monitor key risk indicators”, including credit growth, asset prices, lending conditions and financial resilience.

The RBA noted that almost 800,000 households were set to face higher rates in the coming months as $350bn worth of lending rolled off low fixed-rate loans onto far higher variable rates.

Mr Lonsdale left the door open to a relaxation of the rules, noting they were “not set in stone”.

“The events of recent years have emphasised that conditions can change rapidly,” he said.

Mr Lonsdale told The Australian in January that the regulator was aware of the “big trade-offs” and “difficult judgment” around the serviceability buffer.

But some lending figures said APRA’s decision to keep its 3 per cent ceiling on loan assessments would only leave borrowers locked into uncompetitive loans at the same time lenders were ­offering discounted rates on refinances in a bid to lure new customers.

Anthony Baum, founder of mortgage assessment fintech Tic:Toc, which holds its loans on the Bendigo and Adelaide Bank balance sheet, said that by holding the serviceability buffer at 3 per cent, APRA was trapping borrowers into bad loans.

“It makes sense for new lending or for borrowers that want more money, but for borrowers that want to do a dollar-for-dollar refinance and increase their affordability and reduce the impact of interest rates, that decision makes no sense at all,” Mr Baum said.

He said existing borrowers not looking to increase their debts had shown capacity to service loans.

“That buffer is substantially lessening competition because it’s not enabling those customers to move to another lender at a lower rate,” he said.

Commonwealth Bank CEO, Matt Comyn.

Data from the Australian ­Bureau of Statistics shows new loan commitments fell 4.3 per cent in December, but total debt refinancing was tracking near its record peak.

Commonwealth Bank chief executive Matt Comyn, when delivering the bank’s results, signalled his support to reassess serviceability rates later in the year, after interest rates had peaked.

“As we get towards the top of the rate hiking cycle, we’ve seen a reduction in borrowing cap­acity (and) it might be appropriate then to revisit that,” he said.

But he said he was “not uncomfortable with the settings”.

Mr Comyn had supported moves in late 2021 to lift the serviceability buffer from its earlier level of 2.5 per cent amid concerns of runaway house price growth.

APRA lifted the buffer to 3 per cent in October 2021 as there were “growing stability risks” from banks writing loans to borrowers turbocharged by ultra-cheap credit lines.

The move to hold the serviceability rate at 3 per cent above the product rate takes APRA back towards its older rules introduced in 2014 that required lenders to assess residential mort­gage borrowers at a floor of at least 7 per cent.

APRA ditched these rules in late 2019 after the rate grew increasingly disconnected from the cash rate, which had fallen to 1 per cent.