Twice this month, I have attacked the Coalition’s Andrew Bragg for promising to ease lending standards to help, including by scrapping responsible lending laws (see here and here).
I have argued consistently that twenty years of empirical evidence demonstrates that demand-side “affordability” measures, such as looser credit provision, have helped push up the price of housing.
Increasing lending to marginal buyers would exacerbate the housing affordability problem by inflating prices, increasing consumer debt, and compromising financial stability.
However, one area where I agree with Bragg relates to APRA’s 3% mortgage serviceability buffer in relation to refinances.
Earlier this week, Bragg argued that APRA’s 3% buffer could “create mortgage prisons, where refinancing is impossible”, citing the following example from The Finance Brokers Association of Australia:
“A family took out a $1 million mortgage when rates were 3%, and serviced their loan with a buffer at 6%”.
“Lending rates are now 6%, and the family wishes to refinance to another lender to secure a lower rate, but cannot demonstrate serviceability at 9%, even though they are comfortably meeting repayments now and there is no prospect of significant further rate rises”.
I agree that APRA’s 3% mortgage buffer should be removed for mortgage refinances for three reasons:
- These borrowers are already ‘in the market’ and were assessed for serviceability when they initially originated their loans.
- Trapping them with their existing lenders at uncompetitive rates is bad for financial stability because it could create unnecessary forced sales.
- Creating ‘mortgage prisoners’ is bad for competition because lenders have less incentive to offer a better rate when they know borrowers are ‘locked-in’.
Retaining the 3% mortgage serviceability buffer on refinances is illogical, unfair, bad for financial stability, and lessens competition.
Andrew Bragg makes a solid case on this issue.
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