Mortgage broking industry divided on APRA change

Members of the mortgage industry have expressed differing opinions on APRA’s move last week to increase the serviceability buffer that banks use when assessing home loan applications. While many don’t expect a major impact on brokers, all agree that the challenge that some borrowers will now face presents a certain opportunity for brokers.

“This is where I think brokers will come to the foreground,” FBAA managing director Peter White AM told MPA.

He said that while something needed to be done to cool the housing market in the current era of “extraordinarily low interest rates that can never be maintained long term,” it needed to be done in a careful way.

“One way to do that is to put a bit of constraint around what people can afford to borrow,” he said. “It’s not necessarily wrong but it also doesn’t make it right. It’s something that needs to be carefully balanced as it goes forward so that you don’t inadvertently stall a sector of the borrowing marketplace.”

He said there were certain risks involved in APRA’s approach at targeting the serviceability buffer. While some first home buyers could have their borrowing power reduced by the change, the ability for these purchasers to broaden their geographic scope could mitigate against this damage, he said.

“The worry becomes people who have preapprovals on loans and who are looking for a property or waiting for a unit development to be completed,” he said. “They could wind up going for a reassessment and no longer afford their loan, so that could cause an almighty amount of problems.”

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

An even bigger worry for White is the potential for “mortgage prisoners,” people who become trapped in their existing loan because they can’t meet the increased serviceability requirement of a lender with a cheaper rate or better structure.

“The risk with that is that it may be in my best interests to refinance my loan elsewhere,” he said. “I might be getting a different structure that’s more amenable to my situation, it might be a slightly better interest rate, but because of this floor rate change I don’t meet that higher serviceability standard.”

This could impact borrowers looking to restructure and consolidate debt, those who have been stuck paying higher interest rates and even those wanting to renovate. The situation becomes even worse when rates start to rise, he added.

“You can’t refinance out because of the servicing rate and so you’re getting ripped off by the existing lender,” he said. “This has happened in the past, this isn’t just Peter White creating bullshit out of thin air. I really want government, the Treasurer, APRA, to keep a very close eye that these prisoner playouts don’t happen.

“I understand in the purchase finance space what is trying to be achieved there, but the refinance sector could be put into all sorts of pain by being held captive by their existing lender because they simply can’t refinance out. I see that as a very challenging and very real risk.”

He said while he thought the increase in serviceability buffer to 3% was an appropriate measure in the purchasing space, he would like to see a different rule for refinances.

“There needs to be some consideration so that you don’t stall the refinance marketplace,” he said.

Since the APRA measure only applies to ADIs, non-banks could prove a winning choice for many consumers impacted by the change – something that brokers could play a pivotal role in for their customers, he said.

“This could be an advent of a surge in non-bank lenders coming to the party and rescuing all those borrowers for us,” he said. “But this is where brokers will have the opportunity to look broadly across the lending sector and say, ‘these are the opportunities that best suit you and act in your best interests’.”

Mortgage Choice and Smartline CEO Susan Mitchell described the change as a lever that APRA had pulled in order to “take some heat out of housing credit.”

“It’s a decision that will see little to no disruption to existing mortgages and won’t impact interest rates,” she told MPA. “I expect impacted lenders to move quickly on this announcement and provide clarity on when they will introduce the new buffer, as well as what this will mean for pre-approvals and applications already underway. They will also need to clarify how the new buffer may affect borrowers looking to refinance. 

“It’s important to note APRA isn’t trying to reduce house prices or loan amounts, rather it’s curbing the risk of the growth in home loans that are being written to marginal and highly indebted borrowers.”

She referenced APRA’s claims that the potential impact to housing credit growth would be modest.

“While the buffer applies to all new borrowers, brokers are likely to see the most impact occur for clients that are on the fringes of being approved for home loans,” she said. “Borrowers are expected to have their borrowing capacity reduced by about 5%, and this will likely have a greater impact on investors because they generally are leveraged and have other existing debts.”

Daniel O’Brien of PFS Financial Services said the move by APRA was “no great surprise” considering the surging property market.

“I alluded to this possibly happening a few months back,” he told MPA. “The housing market continuing to surge, would be problematic for lending criteria. Making money easier to get would make the market go even more nuts.

“The government previously promised to loosen credit criteria and make it easier for people to get a loan. They have now backflipped on this.” 

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

Mortgage Advisor at 1st Street Financial Justin Baboucek said the measure seemed a sensible and conservative approach.

“I think based on murmurs from the Treasurer and APRA around possible DTI changes, brokers in general I think were more expecting changes around DTIs rather than the bump to the serviceability buffer,” he said. “I think it’s a good thing (increasing the serviceability buffer) because it’s not a dramatic change. It’s not going to be something that sends shocks through the property market, potentially. Whereas, if there was a sharp change like what we saw around the banking royal commission a few years back, there were significant sudden changes. In comparison to that I think it’s a smart way of approaching it.”

He said in terms of lenders, while some would need to change their servicing calculators, others wouldn’t because of their already conservative approach.

Connective executive director Mark Haron said the aggregator supported the measure.

“In general, I don’t see it as being too significant a change from an industry perspective,” he said. “From a Connective point of view, we support anything that ensures a sustainable housing market.”

He said the increase would help to factor in the higher rates expected early to mid-year following the RBA easing back on its longer-term measures. As markets start to normalise, another challenge could present itself to most of the major banks and the non-bank lenders that rely on securitisation for funding arrangements, he said.

“While the RBA might not move on rates, the market might move and the securitisation rates may increase which may put pressure on banks and non-bank lenders to increase interest rates anyway,” he said.

Haron said the change presented an excellent opportunity for brokers to not only contact their clients but to also deliver education to consumers on what the change could mean for them.

“It’s a great talking point for brokers to contact their customers in general and talk to them about what their goals are and if they’ve got any short to medium terms goals, they can start working with them now,” he said. “I know a lot of brokers are busy, but this is a great communication, education and marketing opportunity as well.”