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No relief for prospective first-home buyers as regulator keeps buffer rate at 3 per cent

The bank regulator has rejected calls to reduce the buffer for new mortgage servicing. The Australian Banking Association, National Australia Bank, ANZ and some federal government and opposition MPs have called for a relaxation of the interest rate test, saying it would discourage first-time buyers from entering the property market. But the Australian Prudential Regulation Authority (APRA) was not convinced by their arguments and said today that interest rates would remain at 3.

The regulator has kept the interest rate buffer at 3%, which does little to help first-time buyers

APRA chairman John Lonsdale said there were still too many risks to reduce the serviceability buffer. (Dominic Lorrimer) In making its decision, the regulator said there were still enough financial risks in the current economy to require a buffer. “We are mindful of the potential for a slowdown in the labour market to have a knock-on effect on household incomes,” APRA chairman John Lonsdale said. “This risk is heightened by uncertainty in the global economic environment, including geopolitical instability…” While house price growth has slowed, it is still 40 per cent higher than before the pandemic, and household debt relative to income is high compared to long-term trends and international peers.

The regulator has kept the interest rate buffer at 3%, which does little to help first-time buyers

While the current buffer is designed to ensure homeowners don’t overspend, critics say it’s discouraging people from buying their first home. (Peter Ray) “This high level of household debt is a key vulnerability if an adverse economic situation arises. We have also seen an increase in non-performing loans, and there is the potential for this to increase further, particularly if unemployment rises.” The repayment capacity buffer means that potential borrowers are assessed not only on whether they can repay their mortgage at the current rate setting, but also whether they would still be able to afford it if rates rose by 3%. While the current buffer is designed to ensure homeowners don’t overspend, critics say it’s discouraging people from buying their first home.“A 3 per cent buffer might have made sense when the official cash rate was 1 per cent, but it makes less sense when the rate is set at 4.35 per cent,” Liberal senator Andrew Bragg said last month. “This buffer is bad news for potential first-home buyers and can create mortgage prison, making it impossible to refinance.” The buffer wasn’t always set at 3 per cent. In late 2014 it was set at 2 per cent, and five years later it was increased by half a percentage point. In 2021, with interest rates at 0.1 per cent, it has risen by another 0.5 per cent.

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