As the clock struck midnight on the eve of Halloween 2021, a chill ran down the spine of Australian homebuyers.
It was no ordinary fright, but rather the realisation that the game had changed, and their dream of homeownership was slipping further out of reach.
Before October 31st, banks had used a 2.5% serviceability buffer to assess home loan applications. But then, like a ghost in the night, the Australian Prudential Regulation Authority (APRA) appeared and announced that the buffer was being raised to a minimum of 3.0%.
Suddenly, borrowers were left scrambling to understand how this change would impact their ability to borrow or finance.
What exactly is a serviceability buffer and how does it impact borrowing power?
Picture this: you’ve been saving for years, carefully budgeting and dreaming of owning your dream home. You find the perfect property, and you’re ready to take out a mortgage to make your dream a reality. But just as you’re about to sign on the dotted line, you’re hit with the news: the serviceability buffers have increased, and you no longer qualify for the loan you need.
In the simplest of terms, a serviceability buffer is the difference between the interest rate on the loan and the borrower’s ability to service that loan, based on their income and expenses. It is a percentage that lenders add to their assessment rate to ensure that borrowers can still afford their loan repayments, even if interest rates increase.
These minimum financial requirements are designed to protect borrowers and lenders alike, ensuring that borrowers can afford their loan repayments and reducing the risk of loan defaults.
However, the impact of these buffers on borrowing capacity cannot be ignored.
As home loan serviceability buffers have increased, many potential homebuyers are finding themselves priced out of the property market. The higher buffers have effectively reduced how much money customers can borrow, making it harder to secure a mortgage.
As the world continues to grapple with economic uncertainty, the APRA has announced its decision to maintain the 3% serviceability buffer for home loans. Despite increasing pressure to ease lending standards, APRA has remained steadfast in its commitment to promoting stability at a systemic level.
In an information paper released on the 27th of February 2023, the regulatory body confirmed its view that the existing policy settings remain appropriate based on the current risk outlook. With the potential for further interest rate rises, high inflation, and risks in the labour market, APRA Chair John Lonsdale emphasised the importance of maintaining a prudent approach to lending standards. As such, the serviceability buffer remains a critical tool in the regulator’s toolkit, providing a buffer in bank capital for stress if needed.
Refinancing and Mortgage Prisoners
The impact of this could be significant, particularly for those who are already struggling to get on the property ladder. It also affects those who may have previously been able to refinance their mortgage or access equity in their home.
Imagine being locked into a mortgage with no way out. You’re paying more in interest than you should be, and your repayments are putting a strain on your finances. You know that if you could just refinance to a better deal, you’d be able to breathe easier. But the serviceability buffers have other plans for you.
This is the reality for many homeowners in Australia who are now classified as “mortgage prisoners.” These borrowers are trapped in their existing mortgages, unable to refinance due to the increased serviceability requirements.
This is particularly true for those who took out fixed-interest rate loans several years ago, when rates were much lower. As these loans expire, many borrowers are looking to refinance. However, with the increased serviceability buffers, many of these borrowers no longer qualify for a new loan, effectively trapping them in their existing mortgage.
The impact of being a mortgage prisoner is significant. These borrowers are paying more in interest than they should be, and many are struggling to keep up with their repayments. With interest rates expected to continue rising, the situation is likely to get worse before it gets better.
What happens next?
Overall, while the decision to maintain the interest rate buffer will likely have an impact on the property market, the broader context of rising interest rates, higher inflation, and a potentially slowing economy mean that the impact on house prices is uncertain. However, APRA’s commitment to strong lending standards is an important step in ensuring the long-term stability of the Australian financial system.
If you’re one of the many homeowners in Australia who are feeling trapped by their mortgage, there is hope. Our Mortgage Action Plan offers a solution to the problem of being a mortgage prisoner.
Our team of experts will work with you to assess your situation and find a way out. We understand the intricacies of the serviceability buffers and can help you find a lender who is willing to work with your unique circumstances.
Comprehensive assessment: We’ll take a detailed look at your financial situation, including your income, expenses, and assets, to determine what kind of loan you can afford
Strategic planning: We’ll work with you to create a plan to pay off your mortgage as quickly as possible, while still allowing you to live comfortably.
Lender matching: We’ll find a lender who is willing to work with your unique situation, whether that means finding a lender who is willing to offer a lower interest rate, or finding a lender who is willing to work with your lower borrowing capacity.
Ongoing support: We’ll be there for you every step of the way, providing ongoing support and guidance as you navigate the process of refinancing your mortgage.
Remember, the serviceability buffer is not the end of the road for borrowers. With careful planning and strategic decision-making, it’s still possible to achieve your property ownership goals.
