Big bank lowers serviceability buffer

Some refinancers will see relief as bank eases requirements

Big bank lowers serviceability buffer

Commonwealth Bank has announced a significant change to its serviceability buffer for refinancers, allowing thousands of homeowners to refinance their loans at a reduced 1% buffer instead of the industry standard 3%. However, this move may exclude homebuyers who purchased properties under government programs aimed at assisting them in entering the housing market.

Many borrowers who took out loans in recent years are struggling to qualify for new loans with better rates due to strict serviceability standards imposed by the prudential regulator, The Australian reported.

CBA's new serviceability buffer will only be extended to reliable borrowers, excluding those who bought properties under affordability schemes or have poor repayment histories. To be eligible for the reduced refinancing offer, borrowers must meet certain criteria, including having a loan that has been open for 12 months or more, a loan-to-value ratio better than 80%, and no delinquency of payments across loans with CBA or other banks in the past 12 months, The Australian reported.

CBA home buying executive general manager Michael Baumann told the publication that the bank recognised that “some homeowners are facing challenges refinancing their loans.”

“The alternative interest rate buffer servicing assessment rate of 1% will support customers refinancing existing home-loan debts which do not pass the standard 3% buffer over a 30-year period principal-and-interest loan, but who would otherwise be eligible to refinance a CommBank loan,” Baumann said.

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The move follows a similar decision by Westpac in May to drop its serviceability buffer for refinancers, signaling an escalation in the competition among Australia's major banks to secure market share. CBA has stated that the Australian Prudential Regulation Authority approved its reduction in the serviceability buffer.

APRA has faced criticism for maintaining strict loan ceilings amidst rising interest rates.

Although CBA's decision may alleviate challenges for some homeowners, market observers anticipate further rate rises in the coming months. APRA has warned banks to maintain interest rate buffers due to the potential for additional rate increases and rising inflation.

RateCity research director Sally Tindall believes the issue banks are addressing is a result of APRA keeping the serviceability buffer too low for too long.

“At the end of the day, the problem was created because rates were at record lows and the buffer was 2.5%,” she told The Australian. “People are stuck in mortgage prison.”

Tindall said that nearly 500,000 borrowers who had taken out mortgages between June 2020 and the present might be unable to refinance their loans.

“There’s billions of dollars worth of loans with a debt-to-income ratio of six times or more,” she said. They’re the ones who need to refinance the most.”

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