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Posted: 2023-06-13 21:18:10

The Council of Financial Regulators has backed the banking watchdog's 3 per cent buffer for assessing whether borrowers can repay a home loan.

APRA requires the banks to add 3 per cent on top of current rates when carrying out a serviceability assessment on customers taking out or refinancing a loan.

That's to make sure borrowers can still make their repayments even if interest rates rise, and with the cash rate now 4 per cent above where it was last April, borrowers assessed during the low rate period are now potentially paying rates well above the buffer.

Given variable rates are pushing up over 3 per cent, borrowers are being assessed on their ability to repay with rates over 9 per cent — making it a much steeper hurdle to clear and limiting the options many have.

At its quarterly meeting, the Council —  which includes members from the RBA, ASIC, APRA and Treasury —said it would continue to closely monitor how lenders are supporting customers experiencing financial hardship, as households experience increased pressure.

The Council recognised that some borrowers were facing challenges in refinancing their existing loan with another lender because of a range of difficulties, including in meeting the serviceability criteria that lenders use.

APRA's prudential framework does not prohibit banks from lending to these borrowers, although APRA expects that banks will set prudent limits for their exceptions to lending policy and monitor such lending closely.

Council members supported APRA's assessment that the serviceability buffer — currently set at 3 per cent — remains at the appropriate level given the current environment, including the high degree of uncertainty and risks to the economic outlook.

The Council noted that APRA would continue to assess the appropriateness of macroprudential policy settings as economic and financial conditions evolve.

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