Despite acknowledging the pressure faced by some households, the Council of Financial Regulators says APRA's serviceability rule is appropriate
Financial regulators have acknowledged the increasing challenges faced by borrowers in refinancing their mortgages but have expressed support for the Australian Prudential Regulation Authority's decision not to lower the eligibility requirements for borrowers trapped in a "mortgage prison."
APRA recently reminded banks of the importance of maintaining interest rate buffers for borrowers, considering the rising loan costs and high inflation, The Australian reported.
Approximately 20% of home loan borrowers are estimated to be unable to switch lenders due to APRA's requirement that banks do not offer mortgages to borrowers who cannot repay a loan at an interest rate three percentage points higher than the actual rate, according to The Australian.
Despite acknowledging the financial pressure faced by some households, the Council of Financial Regulators (CFR), comprising officials from the Reserve Bank, APRA, ASIC, and Treasury, deemed the rules appropriate given the economic uncertainty and risks associated with controlling inflation by raising interest rates, according to The Australian.
The serviceability buffer, currently set at 3%, necessitates that borrowers demonstrate their ability to repay a loan as if it carried an interest rate three percentage points higher than the actual rate. The CFR affirmed its support for APRA's assessment of the buffer's appropriateness in the current economic environment.
Serviceability criteria exceptions
However, the council noted that the serviceability criteria have exceptions. It said in a statement that it “expects banks will set prudent limits for their exceptions to lending policy and monitor such lending closely.”
APRA had previously stated that Australian banks aimed to approve around 6% to 7% of refinancing applications from mortgage prisoners who did not meet the serviceability buffer, The Australian reported. The CFR's statement indicated that APRA would continue assessing the appropriateness of macroprudential policy settings as economic and financial conditions evolve.
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Westpac and non-bank lender Resimac have been notable in their exception policies, with Resimac reducing its serviceability test to 2%. Westpac and its subsidiaries also allow certain borrowers seeking refinancing to undergo a "modified serviceability assessment rate" if they do not meet the standard requirement. Eligible borrowers must have good repayment histories and a credit score of 650 or more.
The financial regulatory quartet's quarterly statement also mentioned that the significant monetary policy tightening had yet to fully impact the economy, giving the central bank room to continue raising interest rates in the coming months, The Australian reported. The statement highlighted that most households are well-positioned to manage the impact of rate hikes due to strong labour market conditions and substantial savings buffers.
With the recent interest rate increase by the Reserve Bank, economists anticipate further hikes, with expectations of a cash rate increase to 4.35 percent in July. RBA governor Philip Lowe recently expressed concerns about inflation potentially being more challenging to control than previously thought.
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