APRA Denies Mortgage Buffer Cut: $17K Setback for First-Time Buyers!

Australia’s financial overseers are holding their ground against growing pressure to modify the serviceability buffer for new home loans. This steadfast decision leaves potential homeowners and those looking to refinance in a tight spot, as the 3 percent stress test remains unchanged.

The Australian Prudential Regulation Authority (APRA) has reaffirmed its commitment to the 3 percent buffer, a measure banks must consider when evaluating loan applications. This comes on the heels of a previous increase from 2.5 to 3 percent in October 2021, a move intended to safeguard borrowers when interest rates were at an all-time low.

APRA chair John Lonsdale articulated concerns about potential financial disruptions persisting in the current climate, despite signs that inflation is stabilizing and interest rates may be on the decline.

RELATED

“We need to remain vigilant about possible shocks to household incomes, particularly as we see a slowing labor market,” he emphasized.

“These risks are further compounded by global economic uncertainties, including geopolitical tensions.”

Lonsdale also highlighted that while house price growth might be moderating, property values are still 40 percent higher than pre-pandemic levels, leading to elevated household debt relative to income.

Do you have a mortgage story to share? Reach out!

“This high level of debt is a significant vulnerability should adverse economic conditions arise,” he noted.

“We’ve also observed a rise in non-performing loans, which could escalate further, especially if unemployment rates climb.”

According to APRA, around 35,000 households are currently struggling to meet their mortgage obligations, facing profound financial and emotional distress.

While this level of stress is somewhat typical historically, it’s alarmingly double what was reported in 2016, and the trend is on the rise.

The enforced serviceability buffer requires lenders to determine if borrowers can repay loans at rates 3 percent higher than current levels.

For instance, a borrower seeking a mortgage at an average rate of 6.3 percent will need to demonstrate the ability to handle repayments at 9.3 percent.

While this buffer is designed to protect borrowers from overextending themselves, it poses significant hurdles for first-time buyers and those aiming to secure lower refinance rates.

Recent analysis revealed that borrowers with an average income of $98,218 could potentially miss out on $17,000 in borrowing capacity simply because they are assessed with a 3 percent buffer instead of the previous 2.5 percent buffer.

Story continues