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Speaking to the announcement, APRA chair John Lonsdale said mitigating risks posed to the financial system was the reasoning for maintaining the 3 per cent buffer rate.
“Our macroprudential policy settings play an important role in guarding against risks to the financial soundness of banks that could, in turn, undermine the stability of the Australian financial system,” he said.
“Looking across the economy, we can see that credit growth for home purchases has moderated from its heights during the pandemic and is now a little below its long-term average. High debt-to-income and high loan-to-valuation ratio lending make up only small proportions of new lending. Lending standards remain sound with banks able to make exceptions to their serviceability policy when it is prudent to do so.”
Concerning both commercial and residential loans, the decision to hold has taken into account an upward trend of non-performing loans.
“Business credit is growing above historical averages, however commercial property prices continue to fall, driven by office and retail sector weakness. While the level of non-performing loans across both residential and commercial portfolios remains relatively low, it is slowly trending upwards,” said Lonsdale.
“Given the uncertain economic and interest rate outlook, including the possibility of higher cost-of-living pressures, it is important that prudent buffers are incorporated in serviceability assessments. APRA will continue to monitor closely bank lending standards and the broader operating environment and should we believe a change in macroprudential settings is necessary, we will make the appropriate adjustments where needed.”
The consensus that the hold is a positive for consumers was shared by Divitis Finance managing director Dylan Salotti, who believes that lowering the serviceability buffer would be like “pouring petrol onto Australia’s critical housing crisis”.
“With the announcement today of no changes to these policies I think given current state of the industry and economy, timing doesn’t seem right to make a change just yet. In future, potentially 12–24 months’ time, it seems like obvious lever to pull by dropping the buffer rate, particularly for business lending to help stimulate the economy,” said Salotti.
“Lowering the buffer rates right now would be equivalent of pouring petrol onto Australia’s critical housing crisis, particularly in capital cities. They want to stimulate the economy but not at the expense of continuing to see Australian property increase a far greater rate than wage growth.
“While a lower buffer rate would potentially be welcomed for the banks and broker industry who has felt a slowdown in business in 2024, I think for consumers these buffers remaining as is for now at least makes most amount of sense.”
While the buffer isn’t regulated, APRA ran into issues last year with ADIs overusing lending exceptions. This resulted in the prudential regulator dishing out a warning, threatening “heightened supervisory attention” for those with higher volumes of lending exceptions.
“[The buffer] provides a contingency for rises in interest rates over the life of the loan, as well as for any unforeseen changes in a borrower’s income or expenses … With the potential for interest rates to rise further, inflation still high and the possibility of weaker labour market outcomes, the buffer is an important risk mitigant,” said Lonsdale.
Further to helping the housing market remain steady, Mountain Mortgages director Lucas Horne said that the buffer hold will help protect borrowers from falling victim to defaults and repossession.
“For brokers this announcement means operating in a stable regulatory environment, which allows for greater focus on delivering quality client advice. This too would apply to lenders and lender BDMs who are providing policy details to brokers. Borrowers will continue to benefit from the protection provided by the serviceability buffer, which helps minimise default and repossession rates,” said Horne.
“This, in turn, enhances the stability and predictability of the property market. Such stability and predictability instil confidence in buyers, whether they are purchasing homes to live in or as investments.”
Despite this, the high buffer makes things hard for those looking to enter the property market. With the cost of living stubbornly high, getting the capital to enter a mortgage is hard enough without an extra 3 per cent tacked on.
This is why Horne believes an increase would be detrimental to young buyers: “While the 3 per cent serviceability buffer is designed to protect both borrowers and the financial system by ensuring that individuals can afford their loans even if interest rates rise, any increase beyond this level would disproportionately affect young investors and first-time home buyers.
“These groups are typically more vulnerable due to their limited financial resources and reliance on higher leverage to enter the property market. Maintaining the buffer at its current level strikes a balance between promoting financial prudence and allowing access to home ownership and investment opportunities for these critical segments of the market.
“In contrast, borrowers who wish to take on more risk have the option to use lenders offering 1 per cent and 2 per cent buffer rates. Similarly, lenders looking to attract more business have the capacity to reduce their buffer rate. This provides a wider range of options, catering to niche and uncommon lending scenarios, and offering additional strategies to avoid financial hardship.”
[Related: APRA holds 3% serviceability buffer]
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