Bank regulation experts and economists say it is time for APRA to review the application of its serviceability requirements in the home loan market, arguing that aspects of its existing policy could contribute to instability in the financial system. APRA on Monday confirmed that regulated lenders would continue to be required to apply a 3 per cent serviceability buffer in their assessments of all home loan applications. The requirement means that lenders must test the ability of a prospective borrower to service a loan at a material premium to the commercial rate being offered at the time the loan application is made. Under APRA’s current policy setting a lender offering a home loan at 4.5 per cent must assess the applicant’s serviceability capacity as if it was priced at 7.5 per cent. While there is a consensus about the merits of this setting for new home buyers attempting to take on a mortgage for the first time, bank experts are deeply concerned about its potential for financial harm to existing borrowers wanting to refinance at lower rates. A perverse effect of APRA’s policy is that it is already preventing some home borrowers  who are now paying 6 per cent on their home loans from refinancing with other lenders pitching mortgages at less than 4.5 per cent. As it stands, APRA’s policy makes no distinction between new home borrowers about to enter the home loan market and existing homeowners eyeing refinancings. The Kafkaesque effects of APRA’s 3 per cent serviceability requirement are set to intensify as the Reserve Bank tightens monetary policy in coming months. Each official rate rise makes it harder for existing borrowers to refinance at cheaper rates because more are bound to fail the serviceability test as mortgages get more expensive. Dr John-Paul Monck, an adjunct professor at the University of NSW, believes the serviceability requirement has been, until now, applied thoughtfully by the regulator, but he says it makes sense for APRA to consider making a distinction between ‘new’ and ‘refinancing’ borrowers. “The serviceability buffer is a useful macroprudential tool that provides the opportunity for more targeted approaches to expansionary or contractionary facets of monetary policy,” he said. “The whole point of such a buffer is to enable some relaxation when conditions call for it, so as to reduce the extremities of peaks and troughs in the credit cycle. “The distinction between ‘new’ lending and ‘refinancing’ would be of some benefit to the buffer itself, because the actual repayment history of  refinancing borrowers presents a useful element for assessing creditworthiness.” Monck, who previously worked at APRA as a senior bank analyst, said the solution to the problem regarding the serviceability requirement was analogous to the one the regulator faced a decade ago when it began to unpack the idiosyncratic risks of owner occupier and investment loans in the mortgage market. “It would make sense for APRA to clarify the application of the buffer to ‘new’ and ‘existing’ borrowings, and possibly instigate bespoke approaches to each,” he said. “APRA acted in a similar vein previously when it started to apply policy settings differently