How We Could Free Up 50,000 New Home Mortgages A Year

You can’t get a first home without a mortgage. It is therefore strange that the Labor government never mentions lending policy as a way to drive home ownership.

This is especially odd when analysis from investment bank Barrenjoey suggests up to 50,000 first home buyers could buy a home with a few tweaks to mortgage rules.

Supply of new houses is critical to solving the housing crisis, but we also need more first home buyers.

Sadly, Labor only seems to have one idea for first home buyers – which is its ill-fated Help to Buy scheme. This shared equity scheme will allow 40 per cent of a home to be owned by the government.

This by definition is not a home ownership policy for people. It is a policy for state ownership of housing, which is why the state-based schemes have been unpopular.

The Senate recently established an inquiry to report on the cost of lending regulation.

What would be the best way to amend the lending and banking rules to help first home buyers? There are two main ideas to consider.

First, we need to be open to the idea that MPs actually care about mortgage and lending laws, rather than just hand it all to a bunch of unelected bureaucrats.

What I mean is that the regulator, the Australian Prudential Regulation Authority, has been allowed to set the rules for first home buyers in the dark without any real scrutiny or interest from the government.

Parliament should be prepared to set rules for mortgages: how they are organised, assessed and regulated.

It is not as if this type of banking policy is akin to monetary policy, which ought to be independent of executive government.

Historically, banking policy has been set by elected governments, and it has, occasionally, dominated election campaigns, as it did in 1949.

Accordingly, the parliament should be prepared to set rules for mortgages: how they are organised, assessed and regulated.

Of course, we need advice from independent experts, and it’s sensible to have operational independence for APRA, but these issues are too important to delegate entirely.

Second, we need to look at the 3 per cent mortgage serviceability buffer that APRA imposes.

What this means is when a home buyer seeks a new loan, they are assessed on their ability to service a mortgage on an interest rate 3 per cent higher than their actual rate.

This means regardless of where the Reserve Bank is in the interest rate cycle, the additional 3 per cent is applied – and it applies to everyone.

It might make sense to have a 3 per cent buffer when the official cash rate is 1 per cent, but much less so when it is set at 4.35 per cent.

The buffer is bad news for prospective first home buyers, and it can also create mortgage prisons, where refinancing is impossible.

The Finance Brokers Association of Australia provided the following scenario to the Senate committee:

A family took out a $1 million mortgage when rates were 3 per cent, and serviced their loan with a buffer at 6 per cent. Lending rates are now 6 per cent, and the family wishes to refinance to another lender to secure a lower rate, but cannot demonstrate serviceability at 9 per cent, even though they are comfortably meeting repayments now and there is no prospect of significant further rate rises.

The Centre for Independent Studies says the buffer has a serious design flaw because it “applies to all loans, including those on fixed rates, even though those rates cannot rise. This is compulsory protection against a risk that cannot occur.”

But when federal Treasurer Jim Chalmers was asked about ideas to help first home buyers, he says it’s not a matter for him.

“[On] the serviceability buffer, this is a matter for the regulators,” he says. “I speak with John Lonsdale, the [chairman] of APRA from time to time about the ongoing appropriateness of that serviceability buffer, and it’s appropriately a matter for him where it is set.”

Thankfully, the Australian people aren’t stuck with a treasurer who seems uninterested in these matters. Thanks to the Senate inquiry, we can all consider options to amend lending rules to help home buyers.

One idea put forward by Barrenjoey we could consider would be to adjust the risk weightings applied to first time buyers.

Barrenjoey noted: “We believe APRA should consider rebalancing risk weights to give an advantage to younger borrowers entering the market. Potentially with two tiers, with an even lower credit risk-weighted asset for first home buyers who borrow to build or buy off-the-plan (helping to address housing supply).

“By lowering the capital requirement, competition would drive down the interest rate charged to younger customers, helping affordability, while still delivering adequate returns to the lenders.”

The idea of reconfiguring the buffer to preference first home buyers needs serious examination. The case for a buffer that is dynamic and flexible has been made. The only question remaining is how it can be sustainably reworked for first home buyers?

We are looking for feedback on this idea.

Fairer mortgages for first home buyers is one of the few ideas in the policy marketplace that would make an immediate practical difference. It would genuinely tilt the scales in favour of first home buyers.

Fifty-thousand new first home buyer loans per annum could be possible if we get these changes right.

It’s bigger and better than anything Labor is offering the Australian people.