John Lonsdale, chair of APRA, says house prices are still 40 per cent higher than the before the pandemic with household debt higher. Picture: John Feder/The Australian.

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The regulator overseeing banks and lenders has delivered bombshell news for home loans ahead of Christmas.

After months of coming under fire for the high serviceability settings on home loan assessments – basically mandating lenders to judge all mortgage applications at interest rates that are 3 percentage points higher than current levels – the Australian Prudential Regulation Authority delivered its verdict.

APRA is refusing to budge from its 3 percentage points serviceability buffer put in place during the pandemic when interest rates plunged to record lows.

The serviceability buffer was 2 points a decade ago in 2014, then increased to 2.5 points just before the pandemic when there were rumblings of financial trouble emerging, and then increased further to 3 points in 2021.

The devastating decision means borrowers and those trying to refinance will be assessed in home loan applications at interest rates that sit around 9 to 10 per cent in the current market.

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Anyone taking out a mortgage is not assessed at their ability to pay at today’s interest rate but 3 points higher due to serviceability rules set by APRA.

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Mozo.comau money expert Rachel Wastell said “the serviceability buffer not only restricts first-time buyers from qualifying for loans, but it also traps some mortgage holders in their current loans”.

She warned many mortgage holders may want to switch to a lower rate to reduce repayments but find themselves unable to prove they can afford repayments based on rates of 9 per cent or more in the current settings.

“Looking at the average variable rates and average fixed rates currently in the Mozo database, this suggests borrowers are needing to prove they can afford repayments on loans based on interest rates above 9 per cent p.a,” she said.

“For the average advertised rates from the Big Four banks, this jumps to above 10 per cent p.a”, an assessment figure that was current a month ago.

Despite Australia emerging strongly from the pandemic, APRA chair John Lonsdale warned that in the past year the risk of financial shocks has persisted and economic uncertainty is shifting.

“Since APRA’s last announcement regarding its macroprudential policy settings in July, inflation has continued to moderate and the risk of higher interest rates has receded somewhat, but we are mindful of potential shocks to household incomes from a slowing labour market,” he said. “That risk is exacerbated by uncertainty in the global economic environment including geopolitical instability.”

APRA chair John Lonsdale. Picture: Chris Pavlich/The Australian

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“Credit continues to flow to households and businesses and is accessible to good quality borrowers. Although house price growth has eased, prices are still 40 per cent higher than before the pandemic and household debt is high relative to incomes both compared with long-term trends and relative to international peers. This high household debt is a key vulnerability if adverse economic scenarios came to pass.”

Mr Lonsdale said “we also have seen an uptick in non-performing loans, with the potential for further rises, especially if unemployment increases.”

“In light of these considerations, APRA maintains its current macroprudential policy settings. We will continue to closely monitor the external operating environment and will consider modifying these settings should that become appropriate.”

An Australian Banking Association spokesperson said “we note APRA’s maintenance of existing thresholds and banks will continue to apply these settings”.

The ABA has been among those advocating for change, telling the federal Senate Inquiry into Financial Regulatory Framework & Home Ownership in late October that “there are some minor updates that could be made to regulatory guidance that would help more first home buyers safely access credit”.

“Today, APRA requires a 3 per cent serviceability buffer above the loan rate to ensure borrowers can manage higher repayments if rates rise or their circumstances change,” the ABA statement to the enquiry said last month.

“APRA’s buffer could be more flexible for first home buyers, adjusted for a borrower’s circumstances and market conditions. This could give many buyers a leg-up when it comes to purchasing their first home.”

APRA said the decision to keep the settings at 3 per cent came after consideration of ‘high household indebtedness and a pick-up in credit growth, persistent cost-of-living pressures, a weakening jobs market and heightened geopolitical risks”, the APRA statement said.

“Balanced against these risks, APRA noted that bank lending standards remain sound and non-performing loans remain low. As a result of these considerations, APRA has today confirmed that the mortgage serviceability buffer will remain at 3 percentage points.”

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