Exclusive - the new risk that APRA's intervention could pose

APRA’s recent move to increase the serviceability buffer that banks use when assessing loan applications has been received by the mortgage industry with a mixed bag of opinion. While some brokers and aggregators have expressed support and little concern toward the change, others have questioned the appropriateness of the measure given the impact it could have on those struggling to crack the runaway property market before they are priced out.

Specialist Finance Group (SFG) aggregation manager Blake Buchanan expressed his concern over the measure in an exclusive interview with MPA.

“I think the measure is an outdated tool used to stem the flow of finance, which will contribute to a property market that is already showing signs of slowing,” said Buchanan. “While I can see what they are trying to achieve, they are potentially doing it at the expense of people like first home buyers, renovators, or generally people who have gone through rigorous tests of affordability to get a loan.”

He said the restriction was reminiscent of the tighter lending rules that were in play in recent years before the property market hit a downturn in 2018.

“This will set us back to the debt servicing levels that we saw a few short years ago before being somewhat relaxed to the appropriate levels we have today,” he said.

Read more: Pre-approved clients may be impacted by lending restrictions

He questioned the likelihood of interest rates rising by an extra 3% over the short term, given the historically low cash rate of 0.1% and the RBA’s commitment to keep it on hold for at least another two years.

“You must ask yourself, if I want to buy a home, I have a good and stable career, I can meet all of the servicing requirements of a loan today, why can I not tomorrow?” he said. “Is it reasonable to assume that the RBA or lenders will increase rates by 3%, say, in five years?

“My answer is ‘no’, there would need to be some extraordinary event for that to occur and I think we have had enough extraordinary events in the last 15 years to last us a lifetime.”

While banks have started raising their long-term fixed rates in recent months following the end of the RBA’s Term Funding Facility (TFF), a number of lenders have started to drop their variable rates to never before seen levels. Recent data from RateCity.com.au has revealed that 27 lenders have cut at least one variable rate in the last month alone while the number of variable rates under 2% has grown to 48, including five investor rates. This compared to just six variable rates under 2% when the RBA last cut the cash rate down to its current level in November last year.

With the lowest owner-occupier home loan rates at the big four currently ranging from Westpac’s 1.89% two-year fixed rate to CBA’s 2.99% five-year fixed rate, and variable rates ranging from 1.99% to 2.72%, adding an extra 3% in the form of an assessment rate would more than double the overall interest cost of every product. 

While members of the mortgage industry have expressed their concern over the impact the increased buffer could have on borrowers who have not yet reached unconditional approval by November 01, when the change comes into effect, Buchanan pointed to another issue that could impact existing mortgage holders looking for a cheaper rate.

“There are risks of clients becoming lender locked, meaning that they will not be able to refinance - even if there is a better rate on offer elsewhere that could improve their cashflow,” he said.

According to Stephen Dinte, the incidence of “mortgage prisoners” has already been prevalent in recent years due to responsible lending obligations that many in the industry have described as “forensic.” In a recent interview, he told MPA that even borrowers who have been consistently paying a higher interest rate than the one they wished to refinance to were hitting roadblocks in the application process because of the stringent guidelines that banks had put in place. This new increase in serviceability constraints could exacerbate this problem by making it even more difficult to refinance to a new loan.

Read more: Industry veteran on how current rules have led to “mortgage prisoners”

Buchanan said other measures to address the growing proportion of heavily indebted borrowers could have been more appropriate.

“I would be looking at other areas of risks that form the basis of lending limits against securities including exposure ceilings,” he said.

He cautioned brokers to prepare for a potentially slower period ahead.

“I think we will likely see a reduction in transaction numbers after this is applied as affordability of loans are affected,” he said. “Brokers have worked really hard to help clients over the past 18 months especially, but like any business, activity can be seasonal, and brokers should be prepared, not only for the busy times, but to withstand slower times.

“With all of that being said, broker market share continues to increase and with these changes impacting a modest segment of the market, brokers have the opportunity to continue growing their business and the amount of people that they assist with access to more lenders than the alternative, and perhaps some that are beyond the remit of APRA and their requirements.”