Lenders must justify serviceability buffers: Deloitte

Australian lenders will need to justify the suitability of their mortgage serviceability buffers to the prudential regulator before it reaches a decision on lending curbs.

Last week APRA chairman Wayne Byres told the Senate Standing Committee on Economics hearing in Canberra that it was counselling “the more aggressive lenders”.

While Mr Byres said this process is “nothing new”, Deloitte partner, financial services James Hickey said the current low-rate environment places particular emphasis on serviceability buffers.

“The lenders will in no uncertain terms understand that the expectation is for the serviceability buffer that they apply on the interest rate is going to be looked at by APRA,” Mr Hickey told Mortgage Business.

“It needs to be justified that it is appropriate, and to take into account that we are at historically low rates and that it suits the purpose in allowing for expectations that if rates do increase, serviceability won’t be questioned, hence making sure lenders are factoring that in appropriately, and not just overweighting it on an asset-lend perspective but also making sure the serviceability lend is strong as well,” he said.

Mr Hickey’s comments come after an industry report raised concerns that the loan serviceability buffers of Australian banks are too low for borrowers to withstand rate rises.

The JP Morgan Australian Mortgage Industry Report singled out Westpac as an example of a lender with a buffer rate of 6.8 per cent, just under two per cent above the current rate of repayment on a standard mortgage.

“That serviceability buffer is actually around the 10-year average mortgage rate,” JP Morgan banking analyst Scott Manning said.

“If you are assessing buffer ability on averages, rather than stressed scenarios, we question whether that is sufficient and we think maybe the three per cent buffer that the UK is proposing actually makes a bit of sense,” Mr Manning said.

 

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