Source : THE AGE NEWS
Home loans were dragged into the election battle this week, when the Coalition vowed to loosen lending rules that it claims are stopping tens of thousands of people from getting a mortgage.
In doing so, Opposition Leader Peter Dutton is tapping into a long-running debate about whether Australia’s banks have become too risk-averse in an attempt to protect customers.
That may sound like an arcane topic for an election being fought around the cost of living. However, Dutton’s mortgage plan would have real-world effects on how much you can borrow from a bank, and for the housing market.
A Dutton government would push for a loosening of rules that affect how much customers can borrow for a home loan, it said this week.Credit: James Brickwood
The proposed change also divides opinion – with some warning that looser lending could push up house prices, while others say it’s needed to ensure credit isn’t available for the relatively rich alone.
What is Dutton proposing to do on home loans?
In a move first telegraphed last year, the Coalition says it will tell the Australian Prudential Regulation Authority to loosen a rule that affects how banks assess new customers for a mortgage.
Under what’s called the “mortgage serviceability buffer”, banks must check how a prospective borrower would cope if interest rates rose 3 percentage points higher than current levels. It means someone taking out a loan with an interest rate of 5.5 per cent must be able to afford repayments at an interest rate of 8.5 per cent.
APRA sets the buffer, and it has moved around in the past, but not since 2021, when it was raised from 2.5 percentage points to 3 percentage points to curb risky lending at a time of rock-bottom interest rates.
Now that interest rates are much higher than in 2021, and they’re expected to fall, critics say it’s too conservative to ensure customers could cope with a 3 percentage point rate rise. Dutton didn’t specify where he wanted APRA to set the buffer. Treasurer Jim Chalmers said he regularly engaged with APRA about the appropriateness of the buffer.
Would that change what I can borrow?
The Coalition’s policy affects “borrowing power” – the maximum amount a bank will lend you. Loosening the buffer is likely to mean many customers would be able to borrow tens of thousands of dollars more (though many people don’t borrow the maximum amount available).
The chief executive of digital mortgage broker Finspo, Angus Gilfillan, estimates someone earning $150,000 could borrow about $750,000 under the current 3 percentage point buffer. Each 0.25 percentage point reduction in the buffer increases their borrowing power by about $35,000, he says.
Gilfillan says the mortgage buffer plays an important role for the borrower and the lender, but there could be a “more dynamic process” to review it annually. He adds that lowering the buffer would put more onus on the customer to plan for how they’d handle higher interest rates.
Who has supported this change and why?
Of the big four, ANZ Bank has been the most vocal supporter of looser credit, with chief executive Shayne Elliott warning cautious lending standards take a disproportionate toll on younger generations trying to buy homes, and those on lower incomes.
“I worry we have created a system where banking or access to credit is just for rich people,” Elliott was quoted as saying in 2023.
National Australia Bank supported Dutton’s move this week, and the Customer Owned Banking Association (which speaks for member-owned banks) last year said first home buyers especially were held back by the buffer.
Barrenjoey banking analyst Jonathan Mott has argued the current rules mean a high share of credit is flowing to wealthy borrowers, depriving those on lower incomes the chance to buy property. The property sector also backed Dutton’s move: the Housing Industry Association claimed the buffer is locking people out of homes they would otherwise be able to afford.
What about the risks of looser lending?
Dutton’s plan doesn’t have universal support in the banking world. Commonwealth Bank and Westpac – the two biggest players in home loans – backed the status quo in previous comments to a parliamentary inquiry.
APRA has also decided, repeatedly, against loosening the buffer. In November, it noted house prices were 40 per cent higher than before the COVID-19 pandemic, saying high household debt was a risk if the economy worsened and more people lost their jobs.
Others pointed out that allowing people to borrow more, at a time when we are struggling to build enough new homes, could result in buyers bidding up house prices further.
MST Marquee analyst Brian Johnson said: “I just think the inevitability of it is creating yet more demand, in a market where there’s a constrained supply of houses. To me, it feels politically driven.”
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