CFR supports APRA’s 3% buffer

The Council of Financial Regulators (CFR) has stated in its Quarterly Statement for June 2023 that its members supported the Australian Prudential Regulation Authority’s (APRA) assessment that the serviceability buffer of 3 per cent remains at the appropriate level as a result of the current economic environment and high degree of risks and uncertainty to the economic outlook.

The CFR did note that APRA would continue to assess the “appropriateness of macroprudential policy settings” as financial and economic conditions continue to evolve.

The council acknowledged that external refinancing activity for home loans remained at “very high levels”, which reflected strong competition among lenders.

However, it noted that some borrowers were in the middle of refinancing challenges with other lenders due to a range of difficulties, such as meeting the serviceability criteria that lenders use.

The council further stated that although APRA’s prudential framework does not prohibit banks from lending to these borrowers, the prudential regulator still expects banks to set prudent limits for their expectations to lending policy and to “monitor such lending closely”.

Indeed, APRA has warned banks that lenders with higher volumes of lending exceptions will face “heightened supervisory attention”.

Chair of APRA, John Lonsdale, wrote to banks recently to remind them of APRA’s expectations when it came to managing exceptions to housing lending policy.

Mr Lonsdale noted in the letter that some banks have recently announced changes to their exception processes to support borrowers experiencing serviceability challenges.

APRA reiterated that banks must apply a 3 per cent minimum serviceability buffer above the housing loan interest rate when assessing borrowing capacity, stating this “provides a contingency for rises in interest rates over the life of the loan as well as for any unforeseen changes in a borrower’s income or expenses”.

Notably, Westpac brought in a new Streamlined Refinance policy on 22 May that is designed to help more customers refinance their existing home loans to the major bank.

Westpac said that while applications to refinance an existing consumer mortgage will continue to be assessed under standard serviceability criteria and document verification requirements, a “modified serviceability assessment rate” may be applied if certain customers are unable to meet serviceability under the standard criteria.

As such, this rate would be applied as a credit exception to new and existing consumer mortgage commitments.

[RELATED: APRA warns banks about overusing lending exceptions]