A major bank push for relaxed mortgage lending standards has been slammed by advocates and financial counsellors who say it would push even more risk onto struggling families.

The Australian Banking Association said at a Senate hearing on Thursday that lowering the buffer that lenders need to consider when assessing a mortgage would help first-home buyers.

Currently a 3 per cent buffer rate is added to mortgage applications to stress test a borrower’s ability to repay if interest rates suddenly soared.

It’s designed to protect against a flurry of defaults threatening financial stability when rates rise. However, it also reduces the borrowing power of buyers, which banks argue worsens affordability.

ABA policy director Craig Evans said a more “flexible” buffer rate that reflected borrower “circumstances” would “give more buyers a leg up when it comes to purchasing their first home”.

Too risky

But the push has been slammed by consumer advocates and financial counsellors, who warned relaxing prudential regulations would just encourage people to borrow more under riskier terms.

Mortgage Stress Victoria chief executive Nadia Harrison said relaxing prudential standards risked “devastating human consequences” and would be a “knee jerk reaction” to the housing crisis.

“An irresponsible home loan can leave home owner borrowers in insecure housing or homelessness as well as additional debt, and they’re emotionally and socially crippling,” she said.

National Australia Bank home ownership executive Andy Kerr said “modest” reforms to prudential regulations would improve affordability, though Westpac told the hearings it sees the current buffer rate as “appropriate”.

Explained: Mortgage buffers

Mortgage buffer rates reduce the borrowing power of first-home buyers, but as the Australian Prudential Regulation Authority said, there’s an important reason for the protection.

In essence, regulators want to ensure that banks only hand out loans to people who could afford to service their repayments if rates rose dramatically.

That’s because large numbers of mortgage defaults occurring in quick succession can destabilise bank balance sheets and lead to much wider financial turmoil.

That was seen during the global financial crisis in the US and Europe back in 2008-2009.

APRA executive board member Therese McCarthy Hockey said the buffer rate was a tool for protecting financial stability and not “shaped to solving an affordability problem”.

“Affordability of housing is, no doubt, a challenge,” McCarthy Hockey said.

“But we want to draw a clear distinction between housing affordability and access to finance. APRA’s role is around access to finance.”

Pandemic test

APRA actually increased the buffer rate during the Covid-19 pandemic when first-time buyers rushed into the market to take advantage of interest rates being nailed to the floor, sparking concerns about what would happen if rates suddenly rose.

Of course that did happen; the RBA hiked interest rates from 0.1 per cent to 4.35 per cent over a period of just 18 months, which was the fastest increase in borrowing costs in Australian history.

But most households have been able to weather the increases in mortgage bills, with APRA knowing that each person who bought a house during Covid was able to afford the majority of the rate hike.

“During that global financial crisis period, there were over 5000 home repossessions each year [in NSW],” Harrison told senators on Thursday.

“In contrast with comparable hardship in this current cost-of-living crisis with significantly higher housing prices … there were only 1413 repossessions [in 2023], and in 2024 they’re projected to be about 1600.”

Julia Davis, senior policy and communications officer for the Financial Rights Legal Centre, said relaxing prudential standards was a “lazy” policy idea that wouldn’t address the housing crisis.

“We know that borrowers are willing to stretch and stretch and stretch because they are desperate to get into a house and it is just, to be honest, a lazy policy idea that puts all the risk on the people who can least afford to manage it,” Davis said.