Australian Prudential Regulation Authority banking regulator reaffirms lending buffer rules

•  Banking regulator declares it won’t change rules
• Canstar says it’s harder to get a loan or refinance 

Australians are set to have a harder time getting a home loan as the banking regulator refuses to budge on strict lending rules – but one financial expert says it’s time for change.

The big banks are all expecting more interest rates rises from the Reserve Bank in coming months to tackle the worst inflation in 32 years. 

More rate rises means someone wanting a home loan can’t borrow as much while strict lending rules are making it harder for a struggling borrower to refinance a loan.

The Australian Prudential Regulation Authority on Monday reaffirmed that banks would continue to be required to assess a borrower’s ability to cope with a three percentage point increase in variable mortgage rates.

Chair John Lonsdale said that higher threshold, which had been in place since November, 2021, was needed. 

What an average Australian can borrow

Canstar calculated an Australian on an average, full-time salary of $94,000 would now be able to borrow $436,000.

But this individual’s borrowing capacity would have been $21,000 higher, at $457,000, if the Australian Prudential Regulation Authority lending buffer was still at 2.5 percentage points instead of 3 percentage points.

That’s the difference between being able to buy a $545,000 house or a $571,250 house with a 20 per cent mortgage deposit. 

‘On that basis, we believe our current macroprudential policy settings remain appropriate,’ he said.

‘In particular APRA’s view is that the 3 per cent level remains prudent given the potential for further interest rate rises, high inflation and risks in the labour market.’

But Effie Zahos, Canstar’s editor-at-large, said the stricter mortgage buffer was becoming less necessary, with the Reserve Bank expected to stop hiking rates from June.

‘As we reach the rate peak cycle, which clearly we have not, APRA would need to look at this again as it is impacting serviceability,’ she said.

Westpac, ANZ and NAB are expecting the Reserve Bank of Australia to raise interest rates in March, April and May to an 11-year high of 4.1 per cent, while the Commonwealth Bank is forecasting a 3.85 per cent cash rate.

Ms Zahos argued these rate rises meant existing banking regulator rules would make it harder for existing borrowers to refinance.

‘Ironically the very regulation designed to protect consumers is working against those borrowers in mortgage prison,’ she said.

APRA’s mortgage buffer was increased to 3 percentage points, up from 2.5 percentage points, in November, 2021 when the RBA cash rate was still at a record-low of 0.1 per cent. 

Fixed-rate borrowers face 69% repayments surge

$500,000: Up $1,444 to $3,543 from $2,099

$600,000: Up $1,733 to $4,251 from $2,518

$700,000: Up $2,022 to $4,960 from $2,938

$800,000: Up $2,304 to $5,662 from $3,358

$900,000: Up $2,592 to $6,370 from $3,778

$1,000,000: Up $2,881 to $7,078 from $4,197

Repayment increases reflect borrower, with a 25-year loan, taking out a 1.92 per cent fixed rate in May 2021 and going straight on to a ‘revert’ variable rate of 7.41 per cent to 7.43 per cent in May 2023. That’s based on the Reserve Bank cash rate rising three more times to 4.1 per cent. Fixed rate contracts had fine print explaining borrowers would be moving on to a rate that was 3.33 per cent above RBA cash rate. Revert rates with the Big Four banks would be at 7.41 per cent for loans of more than $750,000

Canstar calculated that the increased buffer meant an Australian earning an average salary of $94,000 would now only be able to borrow $436,000, compared with $457,000 under the old rules.

That $21,000 difference in borrowing capacity means an individual with a 20 per cent mortgage deposit would now only be able to buy a house or unit worth $545,000, compared with a price tag of $571,250 if the previous buffer still applied. 

The RBA has, since May, 2022, raised the cash rate nine times to a 10-year high of 3.35 per cent.

This has marked the most severe pace of monetary policy tightening since the Reserve Bank first published a target cash rate in 1990.

Australians who took out a fixed rate loan in May, 2021 at 1.92 per cent face abruptly moving to a ‘revert’ variable rate of 7.43 per cent in 2023 when the two-year period expires, RateCity calculated.

This would mean a 69 per cent surge in monthly repayments unless a borrower was able to refinance. 

A borrower with an average $600,000 mortgage, with a 25-year term, would go from paying $2,518 a month to $4,251.

Credit ratings agency Moody’s Investors Service defended the banking regulator’s strict rules, arguing they were needed with more borrowers likely to be 30 days or more behind in their mortgage repayments as interest rates rose.

‘We expect mortgage delinquency rates will increase over 2023, because rising interest rates, high cost of living pressures and the slowing economy will weigh on borrowers’ capacities to repay debt,’ it said.

Moody’s argued the Australian mortgage sector was ‘in a stronger position in the current housing market downturn’, compared with the Global Financial Crisis in 2008.

‘Risky lending has declined, macroprudential policies have improved underwriting standards, and lenders have a greater propensity to support homeowners than in the past,’ it said.

‘The risk of mortgage delinquencies would have been far greater if loan quality, underwriting standards and lenders’ propensity to support borrowers had not improved since the financial crisis.’

Inflation last year soared by 7.8 per cent, a level well above the RBA’s 2 to 3 per cent target.