Broker calls for greater flexibility to lending rules
When you start counting the ways the chips are stacked against Australia’s first-home buyers, you quickly start running out of fingers.
Basic affordability needs no introduction, especially for Sydney-based FHBs, where it takes nearly seven years for the average couple to save up a 20% deposit on an entry-priced home, according to Domain’s First Home Buyer Report 2025.
True, home deposit saving times are shorter in other parts of Australia, though at nearly five years on a nationwide average, they are far from what can be considered practical.
Thankfully, there’s plethora of government schemes to give FHBs a leg up – if only they were fit for purpose in the current marketplace.
In NSW, FHBs can get a $10,000 grant on a new home worth under $600,000. This is next to useless in a state where the median house price topped $1.2m in December 2024.
Add in the NIMBY movement and a lack of will – or ability – for the government to hit homebuilding targets, and it makes for an unpretty picture.
But while affordability and out-of-touch government schemes are undoubtedly significant roadblocks for FHBs, Mario Reyad (pictured), director and lending specialist at NSW-based Expert Mortgages, believes serviceability is the biggest culprit at this point in time.
Reyad touched on the serviceability issue last month, when MPA put together a policy wish list for the next Australian government. Expanding on the rationale behind reducing the current 3% buffer in a recent interview, Reyad made the case that a more flexible approach to serviceability could be a gamechanger for younger borrowers.
As it stands
The buffer has gone through numerous changes since APRA formally took oversight of loan serviceability in 2014.
From the get-go, banks were told to assess a borrower's capacity to repay a loan using a minimum interest rate floor of 7% or a buffer of at least two percentage points above the loan’s actual rate – whichever was higher.
Over time, APRA acknowledged that this policy unfairly priced buyers out of the market, leading to the removal of the 7% floor.
APRA has maintained the serviceability buffer at a flat 3% since October 2021, meaning borrowers must be able to prove they can service a loan three percentage points above their actual mortgage rate.
Yet after 13 interest rate rises (and one hawkish cut in February) from the Reserve Bank of Australia (RBA), the problems have come full circle. With typical mortgage rates sitting at around 6-6.5%, borrowers are currently having to prove serviceability upwards of 10% – far above the binned 7% interest rate floor.
“Is that a true measure of serviceability? I don’t personally think so,” said Reyad. “And I think that has a knock-on-effect to the housing crisis that we’re having.”
Not only are FHBs struggling to save up for a deposit, “they’ve also got to worry about a 3% buffer being slugged on top”, he said.
Reyad conceded that they are both pros and cons to the buffer. First and foremost, it provides a security net. Borrowers who took out a loan at as little as 2% before the market turned a few short years ago were stress tested at 5%, which would have primed them well for the barrage of rate rises coming their way.
Reyad said: “So there is some merit to it, it’s not absolutely ridiculous, but we do need to have a more dynamic approach.” Particularly when it comes to refinancing.
The refinancing conundrum
In a somewhat comical byproduct of the 3% buffer, Reyad cited several instances where he was forced to turn away clients who wanted to shift onto a lower rate because they didn’t fit the criteria.
Reyad did note, however, that some lenders (mainly the Big Four) have shifted to a 1% buffer for “like-for-like” refinances, providing they have a decent payment history and have been with their lender for more than 12 months.
It appears to be working – in the Mortgage and Finance Association of Australia (MFAA)’s latest Refinancing and Mortgage Stress survey, 68% of mortgage brokers identified serviceability as the main reason clients were unable to refinance in the past six months, compared to over 80% previously.
“Serviceability continues to be the number one challenge for home loan borrowers looking to refinance. We have however seen that this is less of a factor around being able to refinance compared to our first member sentiment survey, in July 2023,” MFAA chief executive Anja Pannek said at the time.
But the flexibility of certain majors is yet to be seen across the wider financial market. Reyad suggested it could be a wait-and-see scenario as the second-tier lenders watch the giants dip their toes.
The MFAA, for its part, has voiced support for opposition leader Peter Dutton’s calls for a review of current lending rules.
Loan Market’s chief executive David McQueen has added to the chorus calling for change. In comments sent to MPA, McQueen said: “Australians applying for a home loan face a 3% serviceability buffer, so if your rate is 6%, you need to show you can afford 9%,” McQueen said.
“That made sense when rates were low. But in today’s high-rate, high-cost environment, it’s locking out capable borrowers, especially first-home buyers and that’s the real opportunity for our political parties to influence and address.”
“Loan Market will always support ways to get more people into more homes,” McQueen added. “But the policy needs to reflect the reality: unless we adjust the rules that decide who can borrow and how much, we’ll keep locking out the very people we’re trying to help.”
For now, serviceability will remain a sizeable, yet arguably necessary, barrier to housing market entry, particularly for FHBs with generally less income at their disposal.
“With limited income and high serviceability buffers… you've really got a crappy formula, if I can use that word, for locking these first-home buyers out,” said Reyad.
Well, someone had to say it.
