The latest inflation data was released last week, and the long and the short of it is that interest rates will likely stay where they are for a while yet, but they aren’t likely to increase, which is a good thing.
The bigger news to come out of the past week, though, was an announcement from the Australian Prudential Regulation Authority (APRA) – the government regulator who sets the rules for banks when it comes to lending.
Among other things, APRA is responsible for setting the ‘buffer’ that banks need to impose when determining whether to lend someone money.
The buffer has been set at 3 per cent since October 2021, which made a lot of sense at the time given that the RBA cash rate was 0.1 per cent – not the 4.35 per cent it is today.
This past week APRA opted to keep the buffer at 3 per cent, citing high inflation and ever-so- slightly increasing rates of mortgage default as its reasoning.
I’ve said it before, and I’ll say it again – there is only truth in numbers.
Inflation is running at 3.9 per cent and it’s on its way down. Mortgage arrear rates are sitting at 1.6 per cent of all loans, which is below the pre-Covid level (1.8 per cent).
What this means is that APRA is being ultra conservative. The banks have been pushing APRA to reduce the buffer rate, with ANZ CEO Shayne Elliott the most vocal on the matter, accusing APRA of “locking out middle Australia from the housing market.”
He’s right. To qualify for a $1 million loan today, borrowers are required to demonstrate that they can make repayments of $8,400 per month when the repayments on that loan would usually be $6,300 per month.
Economists have now all but ruled out any further rate rises and are suggesting it’s likely we’ll see rates come down toward the latter part of this year and early next.
It doesn’t make sense for prospective borrowers to have to jump through the 3 per cent buffer hurdle any longer.
Look, it made plenty of sense when rates were sitting at 2 per cent, but it’s too conservative an approach going forward when the likelihood of further rate rises is low, let alone a rise of 3 per cent.
It just doesn’t make sense.
The non-banks have been seizing on the opportunity, too. Non-banks aren’t governed by the rules imposed by APRA so they’re able to lend with smaller buffers.
The big banks’ market share has dropped from 62 per cent to 57.2 per cent since March 2024, losing market share to the non-banks. One of Australia’s biggest non-banks, Firstmac, dropped its buffer to 2 per cent almost a year ago.
Make no mistake, the CEO of ANZ isn’t on a crusade to provide middle Australia the opportunity of home ownership. He has seen his bank lose a considerable amount of business to non-bank competitors who are trying to do the right thing by would-be Aussie homeowners.
It’s also why it pays to reach out to a broker every so often. As I wrote in Bulletproof Investing, banks change their policies (or, in this case, their policies get changed for them) as often as I change my bed sheets.
This is but one of many of the policies constantly changing when it comes to banks and borrowing options.
Unfortunately, APRA won’t meet again until October this year. In the meantime, take your business elsewhere if you need to.
I implore the decision-makers to start making sense again – Aussies need it!
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