NAB and ABA support "modest changes" while Westpac and CBA want to keep current rules
Australia’s major banks are split over potential changes to the serviceability buffer on home loans, with National Australia Bank (NAB) and the Australian Banking Association (ABA) pushing for more flexibility, while Westpac and Commonwealth Bank (CBA) argue for maintaining current settings.
The serviceability buffer, which requires banks to assess borrowers’ ability to repay loans if interest rates rise by 3%, has been in place since 2021. The Australian Prudential Regulation Authority (APRA) raised the buffer from 2.5% to 3% during a period of historically low interest rates.
With the cash rate now at 4.35%, some industry players are calling for a review, while others maintain that the buffer is crucial to financial stability. The debate was brought to light during a parliamentary inquiry on Thursday.
Westpac and CBA are firmly against reducing the buffer, stating that relaxing lending standards could exacerbate financial stress for homeowners, particularly first-time buyers.
Martin Green, Westpac’s national general manager for property finance, emphasised that increasing borrowers’ capacity could lead to more defaults.
“We do not believe that banks or the community should have an increasing willingness to accept higher levels of home loan defaults,” Green was quoted as saying in a report by The Australian. “The 90-day delinquency rate is already higher for first-time buyers at 1.23% compared with the average homeowner of 1.1%.
“At the end of these percentages are young Australians who are going to experience hardship in a challenging cost-of-living environment. We do not think it’s right to push up our customers’ borrowing capacity to an absolute threshold.”
Meanwhile, APRA stood by the current serviceability buffer, emphasising its importance in safeguarding the financial system. Therese McCarthy Hockey (pictured above centre), an APRA executive board member, stressed in her opening statement the regulator’s role in maintaining financial stability.
“The buffer provides an important contingency for a range of economic shocks, not just interest rate increases but also unforeseen changes in borrowers’ income or expenses,” Hockey said.
She pointed to recent data showing housing credit growth and noted that first home buyers continue to account for around 20% of new loans, in line with historical averages. However, she acknowledged Australia’s high household debt levels and the gradual increase in non-performing loans.
Hockey reiterated that while APRA is open to discussions on the buffer, its primary responsibility is ensuring the long-term stability of the financial system.
“However, we do not pursue a safety-at-all-cost approach,” she said. “We balance a range of factors in making complex and ongoing judgements about our macroprudential tools. We will also continue to work closely with peer regulators in the Council of Financial Regulators.”
In contrast, NAB and the ABA are advocating for a more flexible approach to the serviceability buffer. Chris Taylor, ABA’s chief of policy, told the inquiry that the current regulatory framework could be adjusted to consider future income growth, particularly for first-home buyers.
“Existing regulatory guidance should allow more flexibility for lenders to consider a borrower’s future income growth, where it is prudent to do so,” Chris Taylor (pictured above left), chief of policy at the ABA, told the senate economics committee.
“Against an increase in house prices over the past five years, this is an item that does warrant further consideration, and we would support a sensible discussion with APRA on the review of this buffer to make sure it’s appropriate, to ensure that there is a balance and flexibility for first home buyers when considering their application,” he said.
NAB’s executive for home ownership Andy Kerr (pictured above right) supported this position, suggesting that regulators should explore “modest changes” to help young Australians enter the housing market.
“We see an opportunity to work with regulators and government in a targeted way to look at modest changes to the buffer for first-home buyers, which would provide modest increases in borrowing power for first-home buyers versus the broader population,” Kerr said.
Mortgage industry leaders have also recently made a case to the Senate for the 3% loan serviceability buffer to be lowered, arguing it hinders first home buyers from entering the market and prevents homeowners from refinancing to better rates.
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