APRA scraps 7pc home loan buffer

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James Frost| Australian Financial Review| 21 May 2019

APRA scraps 7pc home loan buffer

The Australian Prudential Regulation Authority has written to banks proposing the 7 per cent serviceability buffer on home loans be removed, in good news for borrowers and the property market.

Wayne Bryes says: “The merits of a single floor rate across all products have been substantially reduced.” Louie Douvis

APRA’s serviceability buffers were introduced in December 2014 as a way of tempering the runaway housing market.

They required the banks to assess all home loans against a floor of 7 per cent or 2 per cent above the rate paid by the borrower, whichever was higher.

The regulator says it has begun consulting with the banks on the removal of the 7 per cent floor but wants to raise the second buffer against the actual interest rate paid by the borrower from 2 per cent to 2.5 per cent.

Banks have typically added 25 basis points to the buffer and most serviceability assessments apply a floor of 7.25 per cent and a buffer of 2.25 per cent.

APRA chairman Wayne Byres said although many of the risks that faced the property market in 2014 such as high levels of household debt still existed there has been some important changes to the operating environment.

“The changes, while likely to increase the maximum borrowing capacity for a given borrower, are not intended to signify any lessening in the importance that APRA places on the maintenance of sound lending standards,” Mr Byers said.

“Rather, it is simply recognition that the current interest rate environment does not warrant a uniform mandated interest rate floor of 7 per cent across all products.”

Mr Byers said as the cash rate moved lower the gap between the interest rate floor and the actual rates paid had become “quite wide in some cases”. The RBA has cut rates by 100 basis points since the buffers were introduced.

ANZ’s head of Australian economics David Plank said the change meant the minimum rate borrowers would be assessed against would be around 6 per cent and described the move as an effective easing in policy conditions.

“In our view this represents a material easing in the credit constraint facing households,” Mr Plank said in a flash note.Advertisement

Two weeks ago, ANZ Bank CEO Shayne Elliott said at the bank’s half year results it was time to “rethink” the serviceability buffer with rates at record lows and predicted to fall even further in coming months.

Mr Elliott said that while it was an overall small number of home loans that were knocked back because they couldn’t meet the floor of 7.25 per cent the measure had probably outlived its purpose.

Mr Elliott’s call to revisit the proposal followed reporting in The Australian Financial Review that regulators were considering adjusting the  serviceability caps instead of cutting the overnight cash rate.

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