First home buyers shut out of market, Senate inquiry told
Mortgage industry leaders have made a case to the Senate for the 3% loan serviceability buffer to be lowered, arguing that it is making it difficult for first home buyers to buy property and is also preventing homeowners from refinancing to a better rate.
The Senate Economics References Committee, which is chaired by Senator Andrew Bragg and whose members include deputy chair Senator Jess Walsh, Senator Barbara Pocock and Senator David Pocock, is leading an inquiry into Australia’s financial regulatory framework and homeownership.
On Wednesday, the committee heard from prominent mortgage and finance industry stakeholders.
They included MFAA CEO Anja Pannek; FBAA external regulatory compliance adviser David Carson; Ranin Mendis, managing director of mortgage brokerage Ello Lending Co; and representing REA Group – Anthony Waldron the Group’s CEO of financial services and Mortgage Choice and PropTrack executive manager economic research Cameron Kusher.
All put forward compelling arguments as to why the 3% buffer imposed by APRA should be lowered and other regulatory reforms enacted to make it easier for first home buyers to enter the market.
REA Group
In REA Group’s opening statement, Waldron (pictured above left) said the company was in a unique position to comment on the topic given it owned Australia’s largest property website, realestate.com.au, with over 12 million visitors in August, and also mortgage broking franchise group Mortgage Choice and leading property data provider PropTrack.
“Homeownership is a goal of many Australians but as the cost of housing has grown over recent decades, the share of Australians renting has increased and the share of Australians that have paid off their mortgage has fallen,” Waldron said.
Australians were taking on greater amounts of debt to purchase more expensive homes and this was impacting on the ownership prospects of many people, especially first home buyers.
Waldron said the recent PropTrack Housing Affordability Report for 2023-24 showed that housing affordability was at the worst level on record, with a typical household earning $112,000 a year only able to afford 14% of all homes across the country.
“We believe there’s an opportunity to reform our financial regulatory framework, to increase competition, encourage greater innovation, improve the delivery of housing, reduce mortgage costs for consumers and help more Australians into homeownership sooner,” Waldron said.
Housing affordability is a housing supply issue and supply could be increased by ensuring finance is readily available to first-home buyers and investors, said Waldron.
REA Group recommendations
Waldron outlined four recommendations to the committee focused on making housing more affordable and finance more accessible:
- Introduce a more dynamic serviceability buffer – the buffer would be wider when interest rates are lower and falling; and narrower when they are higher and near the peak of the hiking cycle
- Remove stamp duty from property transactions and shift to an annual land tax levied on all properties
- Grant first home buyers longer mortgage terms for their first purchase – only available for the first purchase and not for refinancing
- A public securitisation model similar to the Canadian model to reduce overall mortgage costs for borrowers
Responding to Senator Bragg’s question about the effects of the 3% buffer on first home buyers, Waldron said with interest rates peaking and unlikely in the short to medium term to reach the 9.65% borrowers were being assessed at “it makes for more credit-worthy borrowers to get access to the finance they need now”.
Waldron said the higher buffer and credit rationing had many repercussions, including housing developments which were only built once a certain level of pre-sales were met.
“The 3% buffer is also reducing new housing supply,” he said.
Kusher (pictured above, far right) said one of the biggest hurdles for developers and the reason why housing supply was faltering was they couldn’t get enough pre-sales to proceed with their building projects.
He said greenfields developments and inner-city units were heavily reliant on first home buyers. The 3% buffer was affecting first home buyers more because unlike investors they had no equity.
MFAA
Pannek (pictured above second from left) told the committee that Australians were increasingly choosing brokers to meet their mortgage needs, facilitating 73.7% of all home loans, an increase of 16.7% since 2020.
“Mortgage brokers make the mortgage market work better, in particular helping prospective first home buyers navigate the complexity of the market,” said Pannek.
“The role of the mortgage broker extends well beyond the transaction – it involves education on how to enter the market, explain government grants, lenders mortgage insurance and other options. In fact 79% of first Home Guarantee Scheme applications go through brokers.”
Pannek said a mortgage broker’s ability to access dozens of lenders and hundreds of products drove choice and competition in the home loan market for the benefit of borrowers.
As mortgage broker market share had risen, MFAA analysis show that lender net interest margins for new lending had fallen by 52 basis points in the last five years, saving a homebuyer an average of $2,600.
“Our members recognise that the Australian regulatory framework with its focus on responsible lending and the mortgage broker best interests duty plays a vital role in safeguarding consumers,” said Pannek.
MFAA recommendations
Within that regulatory framework, Pannek said the MFAA believed there was a range of opportunities for regulatory enhancements to improve access to homeownership, particularly for first home buyers.
These include:
- a review of APRA standards, particularly the serviceability buffer and capital risk weights to allow for flexibility in lending assessments
- simplifying government schemes
- supporting financial literacy programs
- addressing state taxes
- promoting innovation in the financial sector
Bragg asked Pannek about the impacts of the serviceability buffer on first home buyers.
Pannek said feedback from MFAA members was that the 3% blanket buffer had proven to be a challenge for first home buyers especially.
“Firs-home buyers typically come with lower income and they don’t have existing equity in a property and it’s prevented them from entering the market,” she said.
MFAA research in February 2024 revealed that for MFAA members, serviceability was the number one reason for borrowers being unable to refinance.
Pannek said since then a handful of lenders had applied a 1% exception buffer for like-for-like refinances, with 56% of MFAA members reporting that the 1% buffer made it easier for their clients.
“It’s a natural extension that a change in the buffer would allow more first home buyers in particular to enter the market.”
In response to Bragg’s question about APRA’s mandate, Pannek said there was nothing in it’s mandate or that of other financial regulators that encouraged or promoted homeownership.
“Access to fair and affordable housing is incredibly important to Australia, so it’s something that definitely could be considered.”
FBAA
Carson (pictured above, second from right) said FBAA’s submission to the enquiry pointed out that high fixed entry costs to property, being LMI and stamp duty were the primary issues for new home buyers into the market.
“Secondly, the impacts on borrowing limits with the serviceability buffer … and also the response to responsible lending,” said Carson. “We think those are the major issues which are biting deepest on new home buyers and first home entrants to the market.”
Carson said borrowers were affected by “buffers on buffers”.
“The 3% buffer affects everybody because it loads the capacity of a consumer to service a loan by 3% .. the additional buffers come in when financial institutions are looking at the income of applicants. They will look at the steady, reliable income and they’ll take that [on board] and they’ll exclude additional sources of income that may not be so reliable.’
This meant lenders ignored that income but also “loaded” the expenses of a consumer, increasing the customer’s declared expenses, and then the 3% buffer was added on top of that.
Carson said because first home buyers had smaller deposits and lower income, the buffers and discounts “bite more deeply into what would be seen as the excess to service the loan”.
Bragg also asked about borrowers in “mortgage prison”.
Carson said borrowers who could service a loan when interest rates were at 3% were now faced with rates at 6% and the could still comfortably service that.
“But now if they want to apply for a lower rate loan, it will be assessed at the current interest rate of 6% and buffered at the further 3% so they need demonstrate capacity to service at 9% for the banks to approve the refinance at the lower rate.”
Carson said it was only due to the 3% buffer they couldn’t demonstrate serviceability.
He said first-home buyers should get a lower buffer.
“It also makes sense to apply a lesser buffer to those who are demonstrating an existing ability to service their loan at a 6% rate … you would apply the buffer to the loan they entered into several years prior.”
Ello Lending Co
Mendis said Ello Lending Co believed homeownership was not an aspiration but a fundamental right for all Australians.
“More can and should be done to help first home buyers and help bring their homeownership dream to reality,” he said.
Mendis said there were three key parts to Ello Lending Co’s submission.
Firstly, lender practices were opaque and confusing with brokers playing a key role in navigating these complexities to help borrowers reach their goals, so lender product innovation and reduced risk appetite towards first home buyers needed to be supported by the regulations.
Secondly, the 3% buffer rate disproportionately affected first home buyers, reducing their borrowing capacity.
Mendis said a more nuanced approach to regulatory policies, that differentiated between owner occupiers and investors was essential to creating greater access to finance for first home buyers.
“Finally, while government schemes aimed at helping first home buyers are well intended, they’re not keeping pace with rising prices and wages. There also needs to be a significant investment made to create awareness of the schemes.”
Costs such as stamp duty, and a shortage of affordable housing continues to be big hurdles for first home buyers, said Mendis.
“We believe that challenges facing first home buyers can be addressed with practical, targeted reforms.”
What do you think of the 3% buffer and its impact on first home buyers? Comment below.
