APRA will maintain its 3 per cent mortgage serviceability buffer, saying it remains prudent given the uncertain economic and geopolitical outlook. The regulator published its annual update on its macroprudential policy settings yesterday, reporting that the countercyclical capital buffer will remain at 1 per cent of risk weighted assets. No capital distribution or lending limits currently apply. APRA said this reflected the improvement in new loan quality. The more controversial of the current macro settings is the serviceability buffer. Lenders must apply the buffer when assessing a loan application, to see whether the borrower could continue to service the loan if the rate went up by 3 percentage points from the lending rate. The buffer was increased from 2.5 per cent to 3 per cent in late 2021. Critics argue that the buffer limits refinancing options for borrowers, making them “mortgage prisoners”, and may indirectly cause financial stress.  They also argue a 3 per cent buffer may have been appropriate when rates were at historic lows, but with the rate tightening cycle almost completed a buffer that implies rates could rise a further 3 per cent is unrealistic. Yesterday’s update says: “The mortgage serviceability buffer has proved to be effective over the past 18 months. Housing loan performance has remained sound while households have had to contend with cost-of-living pressures, including the increase in borrowing costs. “Arrears rates and non-performing loan rates have increased only marginally and remain low. While some borrowers have been insulated from higher mortgage rates because they have been on low fixed-rate mortgages, most households that have rolled off to higher variable rate loans have continued to service their mortgages, in part because of the buffer applied to their loans at application. “The serviceability buffer and higher borrowing rates have also contributed to a marked improvement in the average quality of new loans. This improvement has occurred without unduly constraining housing credit.” APRA acknowledged that some borrowers have not been able to refinance their mortgages but it said only a small share of these borrowers were constrained by the buffer. It said more have been unable to refinance because of changes in their financial circumstances and the high-loan-to-valuation ratios of their mortgages.