Mortgage serviceability buffer remains at 3%

The Australian Prudential Regulation Authority (APRA) has confirmed the mortgage serviceability buffer will remain at three percentage points, leaving all macroprudential policy settings unchanged following its review of domestic and international financial conditions and risks.

Alongside the serviceability buffer decision, the countercyclical capital buffer will stay at 1% of risk-weighted assets, and high debt-to-income (DTI) lending limits will continue to allow banks to extend up to 20% of new owner-occupied and investment loans at a DTI ratio of six times or greater.

APRA's macroprudential tools are designed to address system-wide financial stability risks, supporting a stable environment in which households and businesses can borrow, save, and invest. In reaching its decision, the regulator weighed the elevated uncertainty in the operating environment and its implications for financial stability risks.

APRA noted that households remain highly indebted, with housing credit growth in the March quarter strong among investors and around average for owner-occupiers. Signs of moderation in housing prices and credit growth have emerged, while business credit growth remains above its historical average.

Pressure on household and business cashflows has increased on account of higher inflation and interest rates, though non-performing loans remain low. APRA observed that strong financial buffers leave most households and businesses well placed to manage these pressures, and that the serviceability buffer supports the ability of recent borrowers to meet repayments in the face of rising costs.

The regulator also noted that higher-risk mortgage lending remains contained and that lending standards are sound. Preliminary March quarter data show high-DTI lending is well below APRA's prescribed limits, meaning the limits are not currently constraining overall bank lending. However, given that this category of lending had been rising over the past year, APRA judged it prudent to keep the limits in place as a precautionary measure. The banking system was described as well-capitalised, resilient, and positioned to absorb shocks should economic conditions deteriorate materially.

"Since APRA's last update, there has been a shift in the macroeconomic outlook," said John Lonsdale (pictured right), chair at APRA. "Interest rates have increased over recent months amid elevated inflation.

"The conflict in the Middle East is impacting economic and financial conditions in Australia, as higher oil prices add to cost pressures for households and businesses. Consumer sentiment and business confidence have weakened and downside risks to economic growth are heightened.

"Depending on global developments, these impacts could either ease or become more severe in the period ahead. At this stage, arrears and non-performing loans remain low and there is no evidence that the banking system is restricting credit supply to preserve capital positions in response to greater anticipated credit losses.

"APRA's System Risk Outlook, released last week, highlighted that Australia's financial system is resilient and well-positioned to support our economy in a potential downturn. APRA will remain alert for any early signs of risks materialising that could negatively impact financial stability and will adjust macroprudential settings if needed."

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