Last week, the Australian Prudential Regulation Authority (APRA) finalised its proposal to scrap the 7 per cent interest rate floor for home loan serviceability assessments, effective immediately.
Instead, ADIs will be permitted to review and set their own minimum interest rate floor for use in serviceability assessments and utilise a revised interest rate buffer of at least 2.5 per cent over the loan’s interest rate.
APRA sought consultation from industry stakeholders before proceeding with its reforms, with the Customer Owned Banking Association (COBA) among the respondents.
In its submission to APRA, COBA warned against the 50bps increase to the interest rate buffer, claiming that it would reduce borrowing capacity by 5 per cent without materially improving credit quality.
The association claimed that the increased buffer could prompt borrowers to look for alternative finance solutions from non-banks, which are not subject to APRA’s guidance.
“In our view, this additional conservatism does not provide a corresponding level of additional protection, but rather serves to unnecessarily restrict access to credit and potentially sends more borrowers into the non-ADI space,” COBA noted.
COBA added: “A higher buffer will have a negative impact on the borrowing power for higher interest rate products, including products that have ‘honeymoon rates’ off the standard variable rate.”
COBA also pointed to its own study, which found that it takes borrowers an average of 5.9 years to exceed a 2 per cent buffer.
“This provides borrowers with plenty of time to adjust spending habits to minimise the ‘shock’ of higher repayments,” COBA added.
“Similarity, wage growth over this period would also offset higher repayments.”
The association concluded: “While COBA agrees that suing a buffer protects against large interest rate increases, it is unclear how much additional protection is provided from a larger buffer, given the time it takes to breach the buffer.”
APRA’s reforms coincide with the Australian Securities and Investments Commission’s (ASIC) move to update its responsible lending guidance (RG 209).
ASIC is currently seeking consultation from the industry, with several stakeholders, including COBA, issuing their responses.
ASIC will host public hearings in August to further consult on its proposed changes, with stakeholders invited to participate in the hearings to be drawn from the groups or individuals who provided a written submission to ASIC in the first round of consultation.
The hearings will be held in Sydney and Melbourne.