Many borrowers in this situation might find themselves trapped in their mortgages, unable to meet the higher serviceability requirements. These requirements, which now stand at 3 percent, have increased from the 2.5 percent when many of these fixed-rate loans were initially taken out.

Let’s take Westpac’s serviceability assessment as an example. When evaluating fixed-rate loans, Westpac considers the variable interest rate that will apply after the fixed period, along with an additional 3.0 percent buffer. Currently, Westpac’s reference variable housing rate is 8.33 percent. This means that borrowers would have to prove that they can afford repayments at a rate of 11.33 percent. For most borrowers, this would likely be an excessively high hurdle to overcome.

Because of this situation, Westpac and other lenders have started reviewing their credit policies to find possible solutions. Westpac, for instance, recognizes that many borrowers may struggle to meet the 3 percent buffer requirement and has introduced a Streamlined Refinance model that waives the buffer for eligible customers.

This exception applies to customers who meet specific criteria and have a proven history of managing their existing loan obligations.

Despite increasing calls to reduce the buffer, the Australian Prudential Regulation Authority (APRA) has reaffirmed its decision to maintain the buffer at 3 percent.

During a hearing with the Senate economics legislation committee on May 31st, APRA chair John Lonsdale explained, “The 3 percent serviceability buffer set by APRA is crucial to ensure responsible lending. We continuously assess these requirements in response to economic changes. APRA’s assessment is that the current level of the serviceability buffer remains appropriate given the current conditions.”

Lonsdale acknowledged concerns that some borrowers might have limited options for refinancing with another lender due to various reasons such as the impact of rising interest rates, declining housing prices, or changes in personal finances.

However, Lonsdale emphasized that banks do have some flexibility regarding these buffers. He stated, “APRA’s framework does not prohibit banks from lending to reliable borrowers who don’t meet the standard lending criteria. We expect banks to establish sensible limits, controls, and justifications for exceptions to lending policies and to closely monitor these loans.”

Nevertheless, he cautioned, “It’s important to use exceptions responsibly and avoid engaging in riskier lending practices. We will continue to reinforce our guidance and expectations in the future.”