CBA announces reduced buffer alternative

The Commonwealth Bank of Australia (CBA) has announced that it will bring in an alternate interest rate serviceability buffer of 1 per cent for select customers from tomorrow (23 June).

Currently, the prudential regulator expects banks to test 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.

As such, borrowers who may want to take out a variable-rate loan of around 6 per cent, for example, would be assessed on the basis of being able to afford repayments at 9 per cent. Meanwhile, standard revert rates for fixed-rate borrowers are currently around 8 per cent, making serviceability buffers unattainable for many borrowers.

However, several lenders have been bringing in reduced serviceability buffers to help more borrowers refinance and save money on their home loan.

On Wednesday (21 June), CBA was the second major bank to confirm that it would be making available a reduced buffer — of 1 per cent — for eligible refinance applications submitted from Friday (23 June).

Borrowers will need to pass servicing on the higher of alternative buffer rate or the floor rate of 5.4 per cent.

To be eligible for the alternative serviceability interest rate buffer, borrowers must:

• Have a loan-to-value ratio of 80 per cent or less and no lenders mortgage insurance
• Have had their loan for a minimum of 12 months
• Have a full income, expense, and liability verification
• Refinance an amount that is no greater than their existing loan plus the higher of notional $10,000 or 1 per cent of the amount being refinanced to cover fees and/or payout of existing loan/payment cycle

Moreover, refinances cannot have had any delinquencies across any CBA or other financial institution product for the last 12 months and cannot be refinancing a guarantor/property share loan, a bridging loan, a construction loan, or debt consolidation loan.

Government Guarantee Scheme loans and additional top-ups or cash out requests do not qualify either.

Speaking of the decision to introduce a lower buffer for certain borrowers, Michael Baumann, CBA’s executive general manager for home buying, commented: “We know that, due to the current interest rate environment, some home owners are facing challenges refinancing their home loans, so we are introducing an alternate interest rate serviceability buffer of 1 per cent for select customers who meet strict eligibility criteria.

“The alternative interest rate buffer servicing assessment rate of 1 per cent will support customers refinancing existing home loan debts which do not pass the standard 3 per cent buffer over a 30-year period Principal and Interest loan, but who would otherwise be eligible to refinance to a CommBank home loan.”

CBA’s move to drop serviceability buffers in some exceptions followed a similar move made by other lenders, including Westpac and its subsidiaries (Bank of Melbourne, St.George Bank, and BankSA).

According to the major bank, the decision to introduce the alternate serviceability buffer was made in consultation with the prudential regulator and followed further clarification and guidance from the regulator.

Indeed, the chair of the Australian Prudential Regulation Authority (APRA), John Lonsdale, wrote to the banks earlier this month to remind them of the regulator’s expectations when it comes to managing exceptions to housing lending policy and to warn them that any banks reporting large volumes of policy exceptions will be subject to “heightened supervisory attention”.

“It is important that exceptions are used in a prudent and limited manner, so as not to undermine the intent of the core policy. In using exceptions, APRA expects banks to make a prudent assessment of repayment capacity so that there is a good outcome for borrowers and the financial system,” Mr Lonsdale said in his letter.

“Prudent banks would have acceptable reasons and clear justifications for loans written outside policy,” flagging that banks should also consider their responsible lending obligations.

Other banks have been hesitant to do so.

Indeed, AMP Bank’s head of credit, Shane Scott, recently said that the non-major bank would be “sticking with a 3 per cent buffer” on its loans as it considers it to be “very risky” to ignore APRA’s serviceability expectations.

“Our position, at the moment, is it would be very risky to ignore APRA’s mandated 3 per cent [buffer],” he said during a credit webinar earlier this month.

“So we’re sticking with 3 per cent at the moment, but are looking at other concessions that we can make in terms of assessment of income loan terms, etc to help those customers that are facing difficulty in repayments because of the significant rise in interest rates we’ve seen over the last 12 months.”

[Related: APRA warns banks about overusing lending exceptions]