Juggling with Stress
Well a little stress is probably good to keep the mind and body alert, but too much stress can have an undesirable impact! So in this article I’ll deal with ‘stress’ in the context of ‘stress buffers’ and home mortgages.
Back in 2019 many central banks around the world still had ‘quantitative easing’ (money printing) in place. Credit was easy to come by and the supply of money was in abundance. During this time (APRA) the Australian Prudential Regulation Authority made a decision to scrap what was a minimum home loan servicing assessment rate of 7%. At the time it seemed quite sensible. We were in an all-time low interest rate environment and access to credit was important to keep the wheels of commerce turning. If borrowers were only paying say 2.5% as a variable rate for their home loan , why should they be assessed by the bank as having to service that loan at 7%? APRA handed back the responsibility to lenders to set their own minimum home loan assessment rates on the proviso the bank had a minimum stress buffer of 2.5%. This of course then enabled people to borrow more. However , that has led to some borrowers now being in financial hardship, but that’s another story. Returning to the stress testing lenders were now able to use say 5% instead of 7% as a loan servicing stress test.
Moving forward to October 6th 2021. The home loan volumes were still running high as the property market ran hot through the height of the initial Covid outbreak. APRA in it’s wisdom then advised the bank’s to lift the loan servicing buffer from 2.5% to 3%. This was a pre-emptive strike and was meant to help cool down the property market by reducing home purchasers’ capacity to borrow but of course interest rates were still low, and an extra .5% to a great degree was insignificant. Then central banks started to wind back their money printing, and this combined with world inflation pressures, started the increasing interest rate cycle in May 2022.
So today we have variable home loan rates at say 5% after the February 2023 rate rise, and a buffer of 3%. Home loans have a servicing assessment rate of 8% with the potential to rise more. The resulting stress is not only felt now on new borrowers trying to purchase, but also those that have become ‘mortgage prisoners’ in trying to refinance. Having possibly not experienced any significant wage rises borrowers are now struggling in proving they can show loan servicing ‘on paper’. There is now an argument for APRA to reduce the ‘buffer’ from 3% back to say 2% which would partially solve the problem of loan servicing for borrowers. This may very well come to fruition prior to the end of 2023? After all, if people are showing they can meet their variable rate home loan commitments without default, why should they be penalised by not being able to seek better loan pricing? Lets watch to see how APRA juggle this ‘stress buffer’.
Contact Michael on 65832211 if you have any questions.