The Coalition has pledged to relax home lending rules if it is elected.
What exactly is it planning, will it improve housing affordability and are claims that its policies will help young people – especially those without access to the “bank of mum and dad” – accurate?
What is the Coalition’s plan?
The Coalition policy is designed to reduce the serviceability buffer overseen by the banking regulator, used to help determine a person’s borrowing capacity.
A serviceability buffer is the rate on top of the interest rate that the lender adds to test an applicant’s ability to make repayments.
It was set at 2.5 percentage points above the lending rate before the Australian Prudential Regulation Authority (Apra) increased it to three percentage points in late 2021, under the Morrison government. If a bank’s interest rate is 6%, for instance, a 3 percentage point serviceability rate means banks would test whether a borrower could still meet repayments if rates increased to 9%.
The increase was implemented during a time of ultra low rates, albeit with inflation risks looming on the horizon.
The opposition housing spokesman, Michael Sukkar, said on Tuesday the buffer was “overly cautious”.
“This one-size-fits-all rule is stopping tens of thousands of Australians from getting a home loan – even when they can meet the repayments with a prudent margin against unexpected future rate rises,” Sukkar said.
The opposition leader, Peter Dutton, declined to name what rate the buffer should be set at when questioned on Tuesday, saying “ultimately it’s a decision for Apra”.
This raises questions over how the plan would be implemented, given it relies on a future Coalition government telling the regulator to reduce the buffer below what Apra believes is prudent, but not by how much.
Should it be lowered?
The argument for a reduction in the serviceability rate is that given lending rates are now elevated, it’s less likely they will surge another two or three percentage points.
While robust buffers are designed to help protect against customers getting into loans they can’t repay, the downside is that they can push otherwise prudent households into financial distress by limiting their refinancing options.
These borrowers are known as “mortgage prisoners”, and could benefit from a looser serviceability requirement.
But there are downsides to easing restrictions.
Mortgage stress is already elevated and there are concerns that allowing borrowers to take on more debt could come back to bite them, and the wider economy.
A lower buffer would also increase available credit, putting upwards pressure on property prices, pushing home prices even further out of reach for some prospective owners, especially younger generations.
Prof Stephen Whelan, from the University of Sydney’s school of economics, says “demand-side measures tend to push prices higher”.
“It may well get some households currently renting into home ownership … but the household is also exposed to increased risk,” he says, referring to rising interest rates or an economic shock, such as the loss of a job.
“The key to getting more people into homes is to increase the supply of housing, rather than simply increasing capacity of households to pay more.”
Apra has resisted lowering the serviceability level, arguing in October that as well as interest rate changes “the buffer also factored in unforeseen changes in a borrower’s income or expenses, which we have seen play out recently as cost-of-living pressures mount”.
A loosening of lending standards also appears to conflict with moves by the Reserve Bank to guard against measures that could fuel inflation.
Banks can already use discretion to give loans to good quality borrowers who do not fit the standard buffer, however a change in the regulator’s policy would give lenders freedom to issue more loans.
Would it help young people?
Dutton has framed the Coalition’s housing policy as one that will help young people “achieve the dream of home ownership”, especially those without financial support from parents.
“I’m not going to be a prime minister … that is happy with a housing market where only those kids with a bank of mum and dad can buy a home,” he said on Tuesday.
A lower serviceability rate could help some younger borrowers meet lending requirements and buy their first home. At the same time, price rises could push home ownership even further away for others.
Under the policy, the Coalition would require Apra to “adjust the capital treatment” of loans backed by lenders mortgage insurance, which typically refers to borrowers who can’t raise a 20% deposit.
They are often younger borrowers, without access to financial help from their parents, who get charged higher lending rates.
The Coalition would need to ensure the policy has restrictions in place to make sure the benefits flowed to younger borrowers, rather than allow wealthier investors to take advantage of any broad loosening of lending standards.
