Lenders home in on APRA’s higher mortgage serviceability buffer

Some non-banks – while not required to – are adopting the higher APRA mortgage serviceability buffer. Picture: Annette Dew

Will non-bank lenders voluntarily pick up on the banking regulator’s small step to pour cold water on the rampant housing market and rein in indebtedness?

It seems some non-banks, while not required to, are adopting the higher mortgage serviceability buffer the Australian Prudential Regulation Authority outlined on Wednesday. Others are taking a wait-and-see approach and are not moving their buffers.

Non banks are not caught by the APRA changes but some consider it good business practice to move in line with the regulator’s view. All lenders need to be mindful of their responsible lending obligations that are overseen by the corporate regulator, despite so-far unsuccessful efforts by the federal government to change that regime.

As house prices have soared by more than 20 per cent over the past year, APRA is also concerned about the amount of lending being undertaken where a borrower takes on debt that is six or more times their income.

The mortgage buffer is being upped by the regulator to 3 per cent from 2.5 per cent currently by the end of October for banks.

The 3 per cent is then added to the home loan rate charged by banks to gauge if borrowers can repay at the higher level.

RateCity analysis shows using the new buffer, ANZ has the highest stress-test loan rate of its major peers at 5.72 per cent.

Commonwealth Bank has the highest so-called floor rate among the big four – another measure used to assess a borrower’s ability to repay a mortgage – at 5.25 per cent. The nation’s biggest lender upped its floor rate in June from 5.1 per cent.

Interestingly, some banks are being even more conservative. This column understands ING’s floor rate sits above 6 per cent.

In assessing whether someone can repay a home loan, banks use the higher of the mortgage interest rate charged plus the APRA buffer, or their floor rate.

While non-banks – think Pepper Money, Bluestone, Liberty Financial and Resimac – are not caught by the latest APRA change, they are certainly taking notice. Many have warehouse funding facilities that are provided by the big banks and also don’t want to be caught on the wrong side of the Australian Securities & Investments Commission on responsible lending.

In its announcement on Wednesday, APRA made the point that under a specific section of the Banking Act, it can only make rules for non-bank lenders if the sector is deemed to “materially contribute” to financial instability risks. “APRA is closely monitoring trends in non-ADI (authorised deposit-taking institution) lending, but does not consider there to be a basis for a policy response in relation to non-ADI lenders at this point in time,” the regulator’s statement said.

Separately, there was a positive development for non-bank lenders this week when the Council of the European Union removed Australia, along with the Maldives and Eswatini, from a list of noncooperative jurisdictions for tax purposes. The so-called grey list is known as Annex II and had Hong Kong, Costa Rica, Malaysia, North Macedonia, Qatar and Uruguay added in this month’s revision.

Australia was removed because it has implemented “all the necessary tax reforms” required by the Council of the European Union. That means EU investors will have fewer impediments to invest in Australian home loans that are packaged up as bonds, called residential mortgage-backed securities.

Part of Australia’s changed status relates to the passing of local legislation in September to end Australia’s offshore banking unit regime, which facilitated a concessional tax rate of 10 per cent rather than the typical prevailing company rate of 30 per cent.

The regime was causing Australian to be classified a harmful tax regime by the EU and the Organisation for Economic Co-operation and Development.

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Going global

Enterprise compliance provider EncompaaS has attracted some interesting backers as it looks to expand its cloud-based content management and compliance products in global markets.

EncompaaS just ruled off a $14m capital raise led by CVC Emerging Companies, Future Now Capital and Marshall Investments, helped by the fact it has a pipeline of work and has won contracts from a top-five local bank and a NSW government department.

The company has also added a major European bank as a customer and established offices in the UK and US.

EncompaaS chief Jesse Todd’s former roles have included Royal Bank of Scotland’s head of group technology and project lead at outsourcing firm Williams Lea.

EncompaaS is a software as a service compliance platform that, among other things, automates governance across on-premises and cloud content repositories and services.

The company says its platform helps customers transition to a digital workplace quickly, safely and compliantly, which is pertinent given the complexities of remote or hybrid working during Covid-19.

Investors will be banking on a strong growth trajectory. Marshall Investments – set up in 1995 as a family office – was founded by John Marshall who is chairman of APG & Co which spans retail brands Saba, Sportscraft and JAG.

The investment marks the fifth in the past nine months for the Microsoft-aligned Future Now Capital Fund I. John Orrock and Chris Lee’s Future Now will assist EncompaaS to lift its presence within Microsoft’s ecosystem.

CVC Emerging Companies was set up by bankers Christian Jensen and Jonathan Pearce, and EncompaaS marks the third investment for the second fund.

The initial CVC Emerging Companies Fund, established in 2019, is fully invested.