Regulator prioritises financial stability over appeals for buffer reduction
The Australian Prudential Regulation Authority (APRA) has decided to keep the mortgage serviceability buffer at 3%, following its latest review of financial risks and lending conditions.
This buffer, which requires lenders to assess whether borrowers can still meet repayments if interest rates rise by at least three percentage points above the loan rate, remains a key measure in APRA’s approach to managing systemic risk in the mortgage market.
APRA’s review considered factors such as high household debt, ongoing credit growth, and the recent easing of inflation and interest rates. The regulator noted that while financial pressures on borrowers have lessened and lending standards remain robust, the risk of economic shocks from global uncertainty persists.
This decision to maintain the mortgage serviceability buffer comes even as key mortgage and finance industry bodies – including the Mortgage & Finance Association of Australia (MFAA) – have urged APRA to lower the buffer to reflect changing market conditions.
John Lonsdale, chair at APRA, however, said the current buffer level has not restricted new lending to households. “Over recent months, we have seen credit continuing to flow to different borrower segments, including to first-home buyers,” he said. “Declines in inflation and interest rates have eased financial pressures on borrowers and increased borrowing capacity for new borrowers, and lending standards remain sound.
“Looking ahead, however, should interest rates fall significantly further while labour markets remain robust, that has historically led to higher credit growth and leverage, higher house prices and often more risky lending, such as high debt-to-income and investor lending.
“The potential for a recurrence of these trends is something both APRA and the Council of Financial Regulators are carefully monitoring. High household debt is a key vulnerability in our financial system, which has more exposure to residential mortgages than any comparable country.”
Lonsdale said that while lending standards are currently sound, it’s important to be forward-looking and prepared for potential risks at future points in the financial cycle.
“In 2022, APRA updated its prudential standard on credit risk to require banks to be pre-positioned to implement a range of credit-based macroprudential measures, if needed, to address risks to financial stability,” he said.
“To ensure such tools can be activated in a timely manner if needed, we will shortly begin engaging with regulated entities on implementation aspects of different macroprudential tools to manage lending risks. As well as the serviceability buffer, these tools include limits on new high debt-to-income lending, or limits on new investor or interest-only loans.”
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