Australian Banking Lobby's Plan To Lower Interest Rate Buffer For First Home Buyers Sparks Backlash

Consumer rights groups have criticized the Australian banking lobby's proposal to lower the interest rate assessment for first home buyers, calling it a "lazy policy idea" that will shift financial risk onto those who are least equipped to handle it, potentially leading to increased debt for more individuals.

The Australian banking lobby told a Senate inquiry examining financial regulations and homeownership that the Australian Prudential Regulation Authority's (APRA) serviceability buffer, which required banks to add an extra 3% to the advertised interest rate to ensure borrowers can manage potential rate increases, should be adjusted to suit the situations of first home buyers and the current state of the market, The Guardian reported.

However, Julia Davis from the Financial Rights Legal Centre said that letting people borrow more could boost the economy, but it would also put them at risk of financial trouble.

"It is ... a lazy policy idea that puts all the risk on the people who can least afford to manage it."

Critics of the 3% buffer said that it prevented potential borrowers from obtaining home loans because it required them to demonstrate the ability to manage a much higher mortgage than the set interest rates.

Chris Taylor, the chief of policy at the Australian Banking Association, mentioned that reducing the 3% serviceability buffer would make it easier for first home buyers to enter the housing market.

"This could give more buyers a leg up when it comes to purchasing their first home. Existing regulatory guidance could allow more flexibility for lenders to consider a borrower's future income growth where it's prudent to do so," Taylor said.

APRA set a minimum serviceability buffer of 2% above the loan rate in December 2014, increasing it to 2.5% in 2019 and then to 3% in 2021 after the cash rate was lowered during Covid. Since then, APRA has maintained the buffer at 3%, despite the Reserve Bank of Australia increasing the cash rate by 4.25 percentage points.

The APRA established this buffer as a safeguard against sudden hike in interest rates over the life of a loan, and to protect against unexpected changes in a borrower's income or expenses.

According to consumer groups, in New South Wales, there were 5,000 home repossessions annually before the 3% buffer was introduced, but last year, the state recorded only 1,413 repossessions.

Since July, 42,000 people have reached out to the national debt line for assistance, with a third of those calls related to mortgage stress, pointed out Domenique Meyrick, the co-CEO of Financial Counselling Australia.

The banking sector was divided on the issue. While the banking lobby and NAB supported reducing the buffer, Commonwealth Bank and Westpac -- Australia's two largest mortgage lenders -- believed that maintaining the 3% level was crucial for protecting financial stability and reducing the risk of rising defaults.

Currently, APRA allows banks to use a lower buffer under specific "exemptions," which are evaluated on a case-by-case basis. The Australian Banking Association is urging APRA and the Australian Securities and Investments Commission to provide guidance that would enable this practice to be applied more widely.

The federal government's first-home guarantee scheme, which allows first-home buyers to contribute just 5% of the loan while the government guarantees an additional 15%, has led to a spike in the number of new homeowners, Taylor pointed out.

"In the last five years, banks have provided AU$298bn of loans to over 683,000 customers to buy their first home," he said. "This is a 41% increase in customers over the previous five-year period."

Property industry companies have also urged the inquiry to advocate for lower lending buffers to encourage credit growth and sales. The Customer Owned Banking Association, representing smaller banks, too, is calling for a "consideration [to] be given to the size and nature of the serviceability buffer."