Banks begin assessing loans using new buffer rates

Following on from the Australian Prudential Regulation Authority (APRA) advising banks that it expects them to assess new borrowers’ ability to meet their loan repayments at an interest rate that is at least 3.0 percentage points above the loan product rate, several lenders have already made the move.

While APRA stated that banks had until the end of October to apply the new serviceability buffers (or have APRA “adjust individual prudential capital requirements to reflect higher credit risk inherent in new lending”), many banks have told brokers that they will be applying the new buffers from today (29 October).

Bank of Queensland (BOQ), for example, has said that it will change the serviceability buffer from today (29 October).

As such, applications received on or after today (29 October) will be assessed using the new mortgage serviceability buffer of 3.0 per cent.

However, BOQ added that any applications submitted on, or before, Thursday (28 October) that require rework after this date will be assessed under the current 2.50 per cent buffer, provided there is no material change to the application.

Similarly, the Westpac Group (including Westpac, Bank of Melbourne, and BankSA), will be increasing the serviceability buffer rate from 2.50 per cent per annum to 3.0 per cent per annum from today (29 October).

Applications received up to and including Thursday, 28 October that are also accompanied by standard supporting documents sufficient to allow the assessment of the application, will have the previous buffer rate of 2.50 per cent p.a. applied (where pipeline policy is met)

If the current product standard variable rate (less any packaged discount or interest rate adjustment) plus the interest rate buffer of 3.0 per cent per annum is less than the 5.05 per cent per annum floor rate, then the floor rate will be applied as the standard variable rate (SAR). 

If it is greater, then the rate on the loan plus the interest rate buffer is applied as the SAR. 

ANZ will be applying the new margin from Saturday (30 October). While the sensitivity margin will increase to 3.0 per cent, the floor rate will remain at 5.10 per cent. Therefore, the higher of the two rates will be used in the serviceability assessment. 

Heritage Bank said it would be applying the higher of the actual rate plus 3 per cent or the qualifying rate of 5.25 per cent from Sunday (31 October).

Most banks are expected to have the new buffers in place by Monday (1 November).

Speaking at the Senate economics legislation committee in Canberra on Thursday (28 October), the prudential regulator emphasised that while they were not in the business of controlling house prices, they believed the new buffers would help “reinforce the stability of the financial system”.

APRA chairman Wayne Byres commented that the new measures would address “heightened risks in banks’ mortgage lending”.

“We believe this decision, which was supported by the other members of the Council of Financial Regulators (CFR), was a targeted and judicious action that will help to reinforce the stability of the financial system in an environment of extremely low interest rates and rapidly rising house prices,” he said.

“While the banking system is well-capitalised and lending standards overall have held up, increases in the share of heavily indebted borrowers, and leverage in the household sector more broadly, meant that medium-term risks to financial stability were building.”

Mr Byres revealed that more than one in five new loans approved in the June quarter were at more than six times the borrowers’ income, and – at an aggregate level – the expectation was that housing credit growth would “run ahead of household income growth in the period ahead”.

“With lockdowns being lifted, and expectations that the economy will bounce back, APRA considered the balance of risks has shifted such that a timely adjustment to serviceability standards was warranted,” he said.

“It is too early to say precisely what impact this change will have on lending activity, given banks were asked to implement the buffer by the end of this month. 

“Putting aside the impact from other aspects of serviceability assessment, a 50 basis point increase in the buffer will reduce maximum borrowing capacity for the typical borrower by around 5 per cent. 

“Given some borrowers are already constrained by the floor rates that lenders use, and that many borrowers do not borrow at their maximum capacity, the overall impact on aggregate housing credit growth flowing from the change is expected to be fairly modest. To the extent it impacts particular borrower types, we expect a larger impact on investors, given they tend to borrow at higher multiples of their income.

“[I]n taking action in relation to mortgage lending standards, APRA is not seeking to target the level of housing prices. Rather, APRA’s objective is to ensure that mortgage lending is conducted on a prudent basis, and that borrowers are well-equipped to service their debts under a range of scenarios.”

[Related: APRA makes move on home loan buffers]