Banks urged to release borrowers from ‘mortgage prisons’

The Finance Brokers Association of Australia (FBAA) has urged banks to quickly come out with updated serviceability assessment rates so that more borrowers could enter the market.

On 5 July, the Australian Prudential Regulation Authority (APRA) finalised its plans to amend its guidance relating to home loan serviceability assessments.

APRA originally introduced the serviceability guidance in December 2014 as part of a package of measures designed to reinforce residential lending standards. However, it has since said that “in the prevailing environment, a serviceability floor of more than 7 per cent is higher than necessary for ADIs to maintain sound lending standards”.

As such, ADIs are no longer required to assess mortgages with a 7 per cent interest floor, but instead can set their own minimum interest rate floor for use in serviceability assessments and utilise a revised interest rate buffer of at least 2.5 per cent over the loan’s interest rate.

While ANZ and Westpac have so far announced their changes, the managing director of the FBAA has noted that the majority are yet to change their criteria, suggesting that the banks are therefore holding borrowers “to ransom”.

According to FBAA managing director Peter White, many people have been rejected from taking out a mortgage because they are being assessed on the 2014 advice – adding that while this guidance has now been updated, some of the banks have been slow in responding.

He said: “With most lending institutions offering interest rates between 3 and 4 per cent, an assessment rate on 7.25 per cent was unfair.

“I congratulate the ANZ for moving to a more reasonable assessment position last week and Westpac for following suit... I urge the other majors to move as soon as possible.”

Mr White continued: “Brokers are trying to help buyers purchase a home, but banks have been holding them ransom...

“As brokers, it makes it more difficult to get approval and creates immense disappointment and confusion for clients if banks use outdated data to assess the suitability of average Australians to pay off their home.”

He concluded that lenders should update their assessment criteria quickly given that the housing market “needs a boost”.

“The reduction in the assessment rate will make it easier for existing borrowers to refinance so they can escape their existing mortgage prisons because of unreasonable rates and conditions,” he said.

[Related: Major bank lowers serviceability floor]