Brokers see pros and cons of serviceability buffer rate

Brokers across the country have argued for a “common sense” approach to the application of serviceability buffer rates for refinancers after high-profile calls for the rate to be reduced.

Outgoing shadow assistant treasurer Stuart Robert recently voiced support for the moderation of the serviceability buffer rate, saying the regulated rate of 3% was too high in the current market.

The FBAA also supports a reconsideration of the serviceability buffer for people refinancing their home loans, amid widespread fears it could force good customers into painful “mortgage prison” scenarios.

In April, the Reserve Bank of Australia estimated 16% of households with a home loan were in “mortgage prison” and were not able to refinance due to the serviceability assessment rules.

Mortgage broker and finance specialist Dan Gilbert from Australian Property Finance said a reduction in the buffer rate should be considered on a case-by-case scenario for future refinancing customers.

“If there is a situation where the client is not able to switch to another lender offering a lower rate – and  it can be shown that they are genuinely better off elsewhere to save money and ease the stress – then in such a case an exception should be considered,” Gilberte said.

Matthew Posselt, owner and broker at Elite Finance Australia based in Perth, agreed that a common sense approach should be applied to borrowers in home loan refinancing scenarios.

“If the refinance is going to put the customer into a better position with lower repayments, and they have a proven track record of making their repayments on time, then it may be appropriate to reduce or waive the buffer,” Posselt said.

“However, the framework for this approach would need careful consideration to ensure that it is fair and equitable for all.”

Finance CBR director Stephanie Smith (pictured above right), who is seeing approximately half of her book come off lower fixed rates between 2% and 3%, said the current servicing buffer rate should be reconsidered.

“There should be a different servicing buffer for clients who hold existing loans that are able to make repayments now on a higher interest rate and are trying to get a lower rate with a bank that will also offers a better experience for them,” Smith said.

“If there was a lower buffer rate of say 1.5% that would still help clients who are stuck paying a higher rate who aren’t able to move due to servicing.”

However, Everlend director and finance broker Evelyn Clark (pictured above left), said she believed the 3% buffer was appropriate, given that it was put into place to protect borrowers from borrowing above their means.

Clark pointed out that, prior to the drastic reduction in interest rates in recent times, banks had been required by regulators to assess borrowers at an interest rate “floor” of 7% to 7.5%.

It was only as rates entered an ultra-low period that regulatory bodies dropped the floor rate to approximately 5%, meaning that borrowers were more easily able to qualify for credit.

“Whilst I agree with a serviceability buffer in theory, the combination of this and the floor rate I believe may have dropped too low in the past,” Clark said. “I don’t believe clients should be assessed on their serviceability at actual repayments (no buffer) or a reduced buffer, as there needs to be room for their financial situations to change.”

Some lenders have moved to create avenues for refinancers who have already serviced for an existing facility and are meeting their current repayments. ANZ and NAB were the first banks to offer simplified refinancing policies for customers who are just switching for lower payments.

What approach do you think should be taken to the serviceability buffer rate in the future?  Share your thoughts or stories on this topic in the comments section below.