Banks propose changing mortgage rules to benefit first-home buyers

When you apply for a mortgage, lenders have a legal responsibility to assess your ability to repay the loan at a higher interest rate.

Typically, lenders add a ‘serviceability buffer’ of at least 3 percentage points, so if you applied for a loan with an interest rate of 6.20% p.a., lenders would calculate whether you could repay the loan if the rate was at least 9.20% p.a..

The point of this serviceability buffer is to ensure borrowers would still be able to make their mortgage repayments in a higher-rate environment.

Since 2022, the Reserve Bank of Australia (RBA) has increased the cash rate by 4.25 percentage points, prompting lenders to make similar increases to their mortgage rates. While this has caused a lot of pain to a lot of borrowers, the overwhelming majority have continued to make their repayments. That’s why a buffer exists.

Why the buffer can be hardest on first-home buyers

The Australian Banking Association (ABA) has proposed improvements to the buffer, in a submission to the Inquiry into Financial Regulatory Framework and Home Ownership, which is being held by the Senate Standing Committee on Economics.

ABA Chief of Policy Chris Taylor said the ABA felt it might be appropriate to adjust the buffer for first-home buyers.

“There are some minor updates that could be considered to regulatory guidance that would help more first home buyers safely access credit today,” he said.

“APRA requires a 3 per cent serviceability buffer above the loan rate to ensure borrowers can manage higher repayments if rates rise or their circumstances change. APRA’s buffer could be more flexible for first-home buyers, adjusted for a borrower’s circumstances and for market conditions. This could give more buyers a ‘leg up’ when it comes to purchasing their first home.”

The ABA, in a submission to the Inquiry, noted that recent research from the RBA had shown that the repayment performance of loans to first-home buyers had been no worse, and in recent times sometimes better, than loans to other owner-occupiers. That research also noted that first-home buyers tended to be younger and therefore had greater potential for future income growth.

“This is of note given that the serviceability buffer is assessed against the borrower’s capacity to repay at the time the loan is being approved (or refinanced); it does not account for the likelihood of a borrower's earning capacity to increase,” the ABA said.

“This restraint can be particularly acute for first home buyers who are often towards the beginning of their careers and can expect to increase their wage earnings over their careers (especially for those on awards with designated increases in earnings for years of experience).”

Time will tell whether the authorities will support the ABA’s request to adjust the serviceability buffer for first-home buyers. The Senate economics references committee will review the evidence and create a final report on 5 December. For the foreseeable future, though, the current rules will remain.