Borrowers’ hands tied by APRA’s serviceability buffer

Research from Canstar explains new buyers earning an average income of $94,000 will miss out on $21,000 in borrowing capacity due to being assessed at the 3 per cent buffer as opposed to the 2.5 per cent buffer applied until October 2021.

The 0.5 per cent buffer difference on a 30-year loan with principal and interest calculated at a 5.92 per cent interest rate sees average income earners able to borrow $436,000 as opposed to $457,000.

Additionally, existing borrowers wanting to refinance to a lower rate could be assessed by a lender as being unable to comfortably meet their repayments, despite paying a higher rate with their existing lender.

Analysis from the service found borrowers repaying a $500,000 loan over 30 years at an average variable rate of 5.92 per cent applying to a lower rate loan of 4.69 per cent would be assessed at a 7.69 per cent rate once the 3 per cent buffer is applied.

Switching from the average variable rate to a 4.69 per cent rate could see borrowers with the same loan value and duration as previously mentioned save $382 per month.

Effie Zahos, Canstar editor-at-large, explained, “When rates were rock bottom, there was certainly a need for APRA to raise the buffer rate”. However, as Australia reaches “the rate peak cycle — which clearly we have not — APRA would need to look at this again as it is impacting serviceability.”

She said that “the buffer acts in the interest of protecting borrowers from rate hikes,” adding that “the issue is not around whether or not it is needed, it’s about the roadblock it’s causing for some existing borrowers trying to refinance to a lower rate.”

Ms Zahos noted the irony that “the very regulation designed to protect consumers is working against those borrowers in mortgage prison.”

In certain cases, she advised that “the benefits should be taken into consideration rather than the rules.”

“If borrowers have not defaulted on their repayments in the past 24 months, have the equity and their risk assessment remains the same, then surely refinancing to a lower rate should be possible,” she said.