Australian lenders are increasing the ‘buffers’ they put in place to assess whether borrowers can afford a mortgage amid growing concerns that some may not be able to make repayments once interest rates begin their inevitable rise, according to the Australian Financial Review.
The information comes in the wake of APRA’s recent statements put pressure on banks to avoid lowering their lending standards while interest rates are at record lows in order to avoid a housing bubble.
“In particular, low interest rates can mask debt serviceability assessments, creating opportunities for borrowers to increase their leverage. The resulting growth in demand for housing loans can also put pressure on housing lending standards as ADIs [authorised deposit-taking institutions] compete to maintain or increase their market share,” read the APRA statement, as reported in Australian Broker.
Australian Bankers’ Association CEO, Steven Münchenberg, says interest rates are about to start going up and that banks need to be confident that loans are serviceable at higher interest rates, according to the AFR.
“Banks always put an interest rate buffer in when they look at whether you can afford a home loan. I understand they have increased that buffer recognising that rates are particularly low.”
The test for borrowers has reportedly changed significantly from last year, when buffers of between 1.25% and 1.5% were standard. AFR sources within the banks have confirmed that a 2% buffer has become typical after the RBA’s latest rate cuts.