APRA is taking a stern view of the reported willingness of some banks to take a slightly more lax attitude to the long-standing ‘serviceability’ buffer on home loans - currently set at 3 per cent. “Some banks have recently announced changes to their exception processes to support borrowers that may be experiencing challenges,” APRA wrote in a letter to all banks, on Friday.

“It is important that these changes are implemented prudently,” the letter said.   Under APRA’s prudential framework, banks must apply certain minimum criteria when assessing a borrower’s repayment capacity. This includes a 3 per cent minimum serviceability buffer, to be applied above the housing loan interest rate. 

The serviceability buffer provides a contingency for rises in interest rates over the life of the loan, as well as for any unforeseen changes in a borrower’s income or expenses.

APRA said at present around two to three per cent of home loans are approved on an exceptions basis.

“With the potential for interest rates to rise further, inflation still high and the possibility of weaker labour market outcomes, the buffer is an important risk mitigant,” APRA said.