Rate rises and a little bit on top: how APRA’s serviceability buffer affects your home loan

if you take that 8.23 per cent loan, you will need to prove to Westpac that you can pay a mortgage rate of 11.23 per cent Picture: NCA NewsWire / Morgan Sette

If you thought you would never have to deal with a mortgage rate above 10 per cent … think again.

After the Reserve Bank raised rates yesterday, Westpac almost immediately raised its mortgage rates by the full 0.25 per cent.

What you may have missed is that its standard variable rate – without a package attached – now stands at 8.23 per cent.

If you are more savvy, you will discover its basic variable loan is 5.59 per cent.

But when the bank assesses your suitability to take out that loan it must follow the rules set by banking regulator the Australian Prudential Regulation Authority (APRA). It must judge your ability to pay the mortgage if interest rates rise by 3 percentage points from here.

In other words, if you are naive, and take that 8.23 per cent loan, you will need to prove to Westpac that you can pay a mortgage rate of 11.23 per cent.

So if you take out the typical principal and interest mortgage of $750,000 … the repayment is $5,903 a month, or more than $70,000 a year. That’s the average mortgage, remember. The average full time adult earnings are $93,000 a year. See the problem?

But it gets worse. Because of APRA’s cutely named “serviceability buffer”, that $750,000 mortgage at 11.23 per cent – over 25 years – would cost $7,476 a year … $89,712, which absorbs almost the entire average persons’ wage. In other words, many people are being locked out of the mortgage market, not only because of the high interest rates, but also because of APRA’s conservatism. APRA’s motive is not purely the protection of the consumer … its real motive is to ensure that the banks do not add risk to their businesses. It does not want a banking crisis here.

What this does, however, is to lock people into today’s skyrocketing rents, which will get worse because of the rising population and a lack of new building. Those same people, because of the serviceability buffer, have little chance to explore the option of buying their own home to get out of the rental market.

Then there are the 600,000 or so people on fixed mortgages who are still to come off those – to face the financial brutality of 12 rate rises. For many of them, the serviceability buffer means they will be locked into their existing borrower, for whom they have previously been approved and qualified. If they explore other lenders, they will be judged as to whether they can pay the full rate … and the 3 per cent buffer on top.

The true weight of these rate rises — on households and on the economy — might only now be dawning on many households.

Ross Greenwood is Sky News business editor