The Coalition has promised to relax home lending rules, saying that it will help more young people buy their own home.

To do so, it has promised as an election pitch to direct the banking regulator to lower the serviceability buffer from the current 3 per cent.

Shadow housing minister Michael Sukkar announced the policy this week, while criticising the current serviceability buffer as overly cautious.

He said the serviceability buffer for new home loans should be set at 2.5 per cent, because too many home-buyers were failing to meet the 3 per cent requirement.

He also said the Coalition would require the Australian Prudential Regulation Authority to change how it treated lenders’ mortgage insurance.

“Right now, Australians without access to the ‘bank of mum and dad’ are punished by higher borrowing costs – even when the actual risk is the same or lower,” Sukkar said.

“Nearly 40 per cent of potential first-home buyers are not able to get finance for a loan … primarily because of that serviceability buffer.

“Now that we have elevated interest rates, a serviceability buffer that has not been flexible with those changes is just blocking Australians.”

The Coalition’s election pitch came as CoreLogic data showed Australia’s property market reaching a new record high.

Nationwide, values increased 0.4 per cent over March, after the Reserve Bank cut interest rates for the first time in four years.

The lift in CoreLogic’s national Home Value Index was broad, with rises in every capital city except Hobart, along with all the rest-of-state regions.

Greens housing spokesman Max Chandler-Mather said relaxing lending rules would only drive house prices up further.

“Forcing young people to take on massive debts they can’t afford will just generate extra profits for the big banks. It is not a solution to the housing crisis. It’s a disaster waiting to happen,” he said.

What is a serviceability buffer?

When you apply for a home loan, the bank needs to ensure that you can pay the loan and also adds a buffer.

This “buffer” is included to ensure that a borrower can absorb rate rises and therefore is not at risk of defaulting on their loan.

For example, with a buffer of 3 per cent, borrowers applying for a home loan with an interest rate of 6 per cent must be assessed to see whether they would still be able to make repayments if their interest rate was to rise to 9 per cent.

For a bit of background, APRA initially brought in a 2 per cent home loan serviceability buffer in 2014.

It increased the serviceability buffer from 2.5 per cent to 3 per cent in 2021. The rate is reviewed and adjusted according to economic conditions.

On Tuesday, Sukkar said that while that 3 per cent serviceability buffer was appropriate when the RBA’s official interest rate was at a record low of 0.1 per cent, it was not with the current cash rate of 4.1 per cent.

What is lenders’ mortgage insurance?

The other area up for disruption is lenders’ mortgage insurance, which typically applies to borrowers who apply for loans with a deposit of less than 20 per cent.

Contrary to common belief, LMI covers the lender rather than the borrower – even though the borrower must pay for it. It covers any shortfall if a borrower defaults on their loan and the sale price is insufficient to pay off their loan.

The cost is calculated based on the size of the deposit and the size of the loan.

The Coalition would seek to no longer require banks to hold more capital against lenders’ mortgage insurance-backed loans – which effectively leads banks to charging higher interest rates on them.

This an edited version of an article that first appeared on View.com.au. Read the original here