Who will qualify for a lower serviceability buffer?

Borrowers rolling off fixed rate loans and who borrowed close to their limit are among those who make be able to qualify for a lower serviceability buffer, Australian Finance Group says.

In a statement released on May 25, the aggregator announced a change in policy which allowed its brokers to recommend mortgages to clients classified as “mortgage prisoners” on which it would apply a serviceability buffer of 1%, instead of the usual 3%.

AFG's policy recognises the credit policies of lenders that currently offer mortgages with a lower serviceability buffer, including Granite, Liberty and Westpac and its brands (Bank of Melbourne, St George Bank and Bank SA).  More lenders are expected to follow, and AFG Home Loans would soon have an offering available, the aggregator said.

Mortgage prisoners are considered to be borrowers who are unable to refinance their current loan and if they were able to do so, would improve their financial situation due to the ability to access market-level rates.

AFG head of sales and distribution Chris Slater (pictured above) said at the heart of its policy was enabling brokers with clients in this situation to facilitate loans with more favourable rates, saving them money and therefore, putting them in a "better financial position".

Sharing examples of borrowers who may meet the policy conditions, Slater told MPA that one example is a borrower who has rolled off a fixed rate loan but due the standard 3% serviceability buffer (which put their payments above their level of affordability), had not been able to access a cheaper mortgage.

Another example is a newer borrower (e.g., someone who took out a mortgage around two years’ ago) who borrowed close to their maximum capacity and who due to the 3% buffer, put their lending out of the affordable range, preventing them from taking advantage of competition in the refinancing market.

“In both instances borrowers would need to demonstrate affordability of their current repayments, which would reduce if they were to refinance to a new loan with a lower interest rate,” Slater said.

Borrowers are assessed at a level 3% above a lender’s interest rates, according to APRA guidelines effective October 2021.  Amid rising interest rates which have increased borrowing costs and serviceability requirements, some industry commentators have voiced concern that the 3% buffer is too high.  In an assessment of its macroprudential setting, released on February 27, APRA said that given the potential for domestic and global economic conditions to deteriorate, a 3% serviceability buffer remained “appropriate”.

Existing 3% buffer can be a stumbling block

Commenting more widely on the 3% serviceability buffer, Slater said that it had been appropriate in the past, because interest rates were at historic lows and steep increases were inevitable.

After 11 official cash rate rises (the most recent in May), interest rates are no longer at record lows, and the 1% buffer is more appropriate, particularly in certain situations, he said.

A higher wholesale cash rate (currently 3.85%), means customers are paying a higher rate of interest on their home loan. Due to the 3% serviceability buffer, many are now unable to refinance to a better deal, he said.

“The introduction of a new policy by AFG is intended to help those mortgage prisoners who meet criteria refinance via their broker, thereby putting more money back in the customer’s pockets,” Slater said.

At a time when inflation and the cost of living has risen significantly, causing household budgets to come under pressure, it is hoped that the ability to potentially refinance to a better deal will have a positive impact in reducing financial stress, he said.

AFG offer conditions

AFG requires borrowers taking advantage of the 1% serviceability buffer to show good repayment conduct on their existing loan and other liabilities and have experienced no adverse changes to their income or expenses over the past year.

Other conditions include the following:

• New or existing customer.
• Refinanced loan must be the same amount over the same remaining loan term.
• Current income and expenses including current loans disclosed and verified.
• Refinance is dollar-for-dollar.
• The loan does not require lender’s mortgage insurance (LMI).
• Repayments would be lower than what the customer is currently paying, when comparing like-for-like with their existing loan product.

AFG said that although mortgage refinance applications would still be assessed under the 3% serviceability buffer, a modified buffer could be applied under ASIC’s Responsible Lending guidelines, which state that it may be reasonable to take fewer steps if new financial obligations can reduce a customer’s repayments and improve their financial position.

The aggregator said that it was committed to creating a fairer financial future for all Australians. 

“By developing this policy, our brokers can provide their customers with choice for an appropriate loan product, therefor helping release themselves from the unfair trap of a mortgage prison,” Slater said.