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APRA holds 3% serviceability buffer

The prudential regulator has decided to maintain the mortgage serviceability buffer at 3 per cent.

According to the Australian Prudential Regulation Authority (APRA), their recent annual update on macroprudential policy reiterated the rationale behind retaining the current policy settings, deeming them suitable.

APRA’s decision took into account several factors, including ongoing cost-of-living pressures, both local and global economic outlooks – particularly the anticipated improvements in labor market conditions – and the potential uptick in borrowing expenses.

Additionally, APRA considered the capital levels on bank balance sheets and the anticipated performance of their lending assets.


In light of these factors, APRA will maintain the mortgage serviceability buffer at 3 percentage points to ensure “prudent lending standards”.

This buffer will remain crucial as a safety net for new borrowers confronting risks amid potentially weaker labour market conditions, according to APRA.

The decision was influenced by persistent high inflation and the likelihood of further increases in borrowing rates, coinciding with the Reserve Bank of Australia’s series of cash rate hikes in 2023, reaching 4.35 per cent, with more anticipated in 2024.

In response to the challenging environment of high interest rates and the stringent 3 per cent buffer, multiple lenders have reduced their lending buffers for eligible borrowers, aiming to alleviate the obstacle faced by mortgage holders in securing properties.

Despite the serviceability challenges faced by potential borrowers, APRA chair John Lonsdale emphasised that by retaining the current settings, APRA aims to strengthen the resilience of Australia’s banks while upholding stringent lending standards.

“APRA’s macroprudential settings have helped to mitigate risks to the financial system,” Mr Lonsdale said.

“The mortgage serviceability buffer has proved to be effective over the past 18 months; housing loan performance has remained sound while households have had to contend with cost-of-living pressures, including the increase in borrowing costs.

“The countercyclical capital buffer continues to put Australia’s banks in a stronger position to serve the needs of our economy, including in times of stress.

“Consequently, it’s important to note that APRA’s macroprudential settings are dynamic and can be adjusted to address emerging risks when they arise.”

The Finance Brokers Association of Australia’s managing director Peter White suggests a nuanced approach to buffer policies.

“A whole lot of people out there are suffering from mortgage stress; they need to be looked after. People are not doing better; they’re actually doing worse,” he said.

He advocated reducing the buffer for existing mortgage holders, believing it wouldn’t heavily impact inflation while potentially easing financial stress.

For newcomers in the market, although he disagreed with the 3 per cent rate, he acknowledged the rationale behind maintaining the current figure.

Alongside maintaining the mortgage serviceability buffer at 3 per cent, the countercyclical capital buffer will persist at 1.0 per cent of risk-weighted assets, providing banks with an extra capital cushion during stressful periods.

Moreover, the capital distribution and lending limits have not been enforced, owing to the improvement in new loan quality and the current credit composition in the economy.

[Related: Only one remaining major to tweak buffers]

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