Lifting the covered bond cap from 8% to 12% gives mid-tier banks, which write most of their loans through brokers, access to cheaper funding
Mid-tier banks, the lenders that rely most on mortgage brokers, could soon get cheaper long-term funding after the federal government released draft rules raising the cap on covered bond issuance from 8% to 12%.
Treasurer Jim Chalmers (pictured) unveiled the draft regulations at the Citi A50 Australian Economic Forum on Friday. Once finalised, authorised deposit-taking institutions (ADIs) will be able to hold up to 12% of their Australian assets in the “cover pools” that back these bonds. The 8% ceiling has stood since Australian banks were first allowed to issue covered bonds in 2011.
Brokers settled a record 81.6% of new home loans in the June quarter. For them, the question is whether cheaper wholesale money turns into sharper pricing from the banks competing with the big four.
What a covered bond actually is
Covered bonds are secured wholesale debt. Investors have a claim on the issuing bank and, if that bank fails, on a ring-fenced pool of assets, usually home loans. Because of that double protection, the bonds usually carry a higher credit rating than the bank itself. That makes them cheaper than the bank’s unsecured debt and lets it sell them for longer terms.
That rating uplift matters most lower down the ladder. Medium banks are rated between A- and A+, compared with AA- for the majors, according to the Council of Financial Regulators (CFR). The CFR’s final report on small and medium-sized banks, handed to government in August 2025, said covered bonds let lower-rated banks issue highly rated debt, which partly closes the funding gap with bigger rivals.
The 8% limit was meant as a depositor safeguard. Assets in a cover pool sit ahead of other creditors, so the more a bank pledges, the less is left for everyone else if it fails. The CFR said a 12% cap aimed to balance the competition gains against that risk.
Why the mid-tiers matter to brokers
Medium banks source more than 80% of their new mortgages through brokers, the CFR found, well above the majors. Non-major lenders have long pitched themselves as more geared to the broker channel. Even so, the majors still took 43.9% of broker-originated home lending in 2025, according to the MFAA’s State of Mortgage and Finance Broking report.
Mid-tier lenders lobbied for the change. In its submission to the CFR review, Bendigo Bank asked for the cap to rise from 8% to 12% for all banks, and for covered bonds to count as high-quality liquid assets.
The Australian Banking Association also backed the move. Chief executive Simon Birmingham said a bigger cap gives smaller lenders “more room to price competitively”, and the ABA called for the change to be finalised quickly so banks can start using it.
Part of a $780m red tape trim
The covered bond change is one of 14 legislative reforms in the 2026–27 Budget that the government says will cut financial sector compliance costs by $780m a year once fully in place.
Friday’s consultation on the Banking Regulations 2026 and a second consultation on the better regulation measures also cover lighter Financial Accountability Regime reporting for smaller banks and a doubling of the bank account withdrawal limit for deceased estate expenses, from $15,000 to $30,000. They also remake banking regulations that would otherwise lapse on 1 April 2027.
What it means for brokers
- Don’t expect it on rate sheets soon. As of the CFR’s 2024 issues paper, only eight Australian banks had issued covered bonds, and on average they had used about a third of their limit. Banks keep headroom for stressed markets, so the bigger cap mainly helps lenders that want to issue more. Any saving still has to be passed on to borrowers.
- Watch APRA’s liquidity call. The CFR said APRA will consider whether covered bonds should count as high-quality liquid assets if the cap changes. A yes would make the bonds easier to sell and could add to the funding benefit.
- Credit reps may get relief. The wider Budget package proposes scrapping the requirement for authorised credit representatives to hold their own AFCA membership. The government says that would ease the load on more than 40,000 credit reps. The package also replaces the annual compliance certificate for credit licensees with a simpler form.
Rates are still the bigger story for borrowers
The announcement has come as households absorb the four rate rises we’ve had this year. The cash rate sits at 4.6% after the September hike, which the major banks passed on in full. The Reserve Bank’s next decision is due on 3 November.
Chalmers used the same speech to warn that Treasury is reworking its forecasts for December’s mid-year budget update. He said higher rates and inflation are likely to mean slower growth and a slightly higher jobless rate.
The government says it intends to begin implementing the reforms later this year, once consultation closes.
