Only 1 remaining major to tweak buffers

Australia and New Zealand Banking Group Limited (ANZ) is now the only remaining big four bank not to have brought in reduced serviceability buffers for certain refinancers.

Currently, the prudential regulator expects banks to apply a 3 percentage point buffer on top of home loan rates when servicing mortgage customers, as standard.

However, with the official cash rate having risen more than 400 bps in the past 14 months, the large proportion of borrowers who took out super-low fixed rates during the pandemic may now find themselves unable to pass the hurdle.

For example, a borrower rolling off a 2.5 per cent-fixed rate loan would need to be able to service a 9.5 per cent loan based on a 3 percentage point buffer being applied to the current average variable rate of 6.5 per cent.

With many borrowers unable to pass this test, there has been growing concern for ‘mortgage prisoners’ facing hardship as a result of having to make high repayments on standard variable rates as a result of not being able to refinance.

Given this, all three major banks — and several non-majors and non-banks — have been announcing exceptions to their credit policies.

National Australia Bank became the latest lender to do so, when it wrote to brokers last week to advise that it would bring in serviceability exceptions from 21 July to enable more borrowers to refinance.

Instead of needing to pass a buffer that is 3 percentage points higher than the product rate (as per the prudential regulator’s expectations), eligible NAB applications received from 21 July may service at a lower test.

While the level of the buffer has not been detailed, NAB has said lower credit exceptions will be determined on a “case-by-case approach” for eligible customers who cannot meet standard lending criteria.

This will only apply to “like-for-like” refinancers with a good credit history who have a loan-to-value ratio under 80 per cent, those who make principal and interest repayments, and those who refinance no more than their current outstanding loan amount (and cover any bank-related fees up to 1 per cent of the loan value).

NAB added that loan terms may be extended, where appropriate, but standard terms and conditions will continue to apply.

Both CBA and Westpac had already announced exceptions, leaving ANZ as the only remaining major bank to do so. It is also the only remaining major bank to have a cashback offer in market.

While Australia and New Zealand Banking Group (ANZ) has the smallest loan book of the big four banks, it grew its mortgage book by the most in May. According to APRA stats, ANZ increased its housing loan portfolio by more than $2.3 billion — increasing owner-occupied loans to $185.3 billion and investor loans to over $93 million.

The decision not to move on buffers may be a reflection of the prudential regulator’s recent warning to banks about lending exceptions.

The chair of the Australian Prudential Regulation Authority (APRA), John Lonsdale, wrote to banks last 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”.

He said: “APRA requires banks to have prudent policies and processes for dealing with exceptions to policy. Large volumes of exceptions can create risks by weakening banks’ risk profiles and increasing the vulnerability of their loan books to future shocks. Historically, serviceability policy exceptions have accounted for a small share of banks’ total housing lending, at between 2 and 3 per cent...

“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.

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

“Loans written as exceptions must be regularly reported to the relevant internal governance bodies of the bank and monitored against risk appetite limits. Prudent boards would assess the impact of any proposed changes to exceptions processes on the bank’s risk profile and risk appetite. This includes understanding the types of loans that are being written outside policy, such as like-for-like refinancing.”

[Related: APRA warns banks about overusing lending exceptions]