Tweak lending rules to tilt the scales for first home buyers

Far too many Millennials and Gen Zs are going to miss out on home ownership. The nation has to find practical ways to tilt the scales in favour of prospective first home owners.

Demand-side measures must be complemented by a serious supply policy, such as the $5 billion last-mile infrastructure fund the Coalition announced earlier this year.

Younger Australians are paying the price of Labor’s failed and twisted housing policies, which prioritise the interests of super funds and unions over people.

Home ownership rates have fallen to historic lows, and individuals without access to the bank of mum and dad are finding it increasingly difficult to get a mortgage.

Reforms to lending regulation will be a solution for many of these Australians.

Since August, the Senate has been conducting an inquiry into improving financial regulations to support first home ownership. This inquiry was established to explore how Australia’s financial regulations can be amended to maintain financial stability while placing greater emphasis on the needs of first-home buyers.

Our inquiry focused on people, not institutions.

We heard from the prudential regulator, banks and mortgage brokers on how we could sensibly tweak lending rules to be more accommodating to first home buyers.

This week, the committee handed down seven recommendations designed to tilt the scales back in favour of first home buyers.

Three of these recommendations, if implemented, will shift the dial on first home ownership. Access to finance will be expanded.

First, the Australian Prudential Regulation Authority needs a new mandate. It should be amended to include a directive to consider first home ownership when implementing lending regulations.

APRA’s current mandate prevents it from considering the impact of financial regulations on prospective first home buyers.

Recognising the importance of intergenerational equity in accessing and achieving home ownership, APRA’s mandate should explicitly account for first home buyers.

The rigid application of the 3 per cent serviceability buffer is locking Australians out of the housing market.

When Treasurer Jim Chalmers provided an update to APRA’s statement of expectations in June last year, it notably excluded any reference to home ownership.

Second, the rigid application of the 3 per cent serviceability buffer is locking Australians out of the housing market. It is a blunt tool which is hitting first home ownership.

Research conducted for the committee by the Mortgage and Finance Association of Australia found that 37.5 per cent of first home buyers were missing out on mortgage financing because of this buffer.

How can you buy a first home if you can’t secure your first mortgage?

The 3 per cent serviceability buffer was introduced when the official cash rate was just 0.1 per cent. As we approach the likely peak of the tightening of the interest rate cycle, retaining this buffer disproportionately affects first home buyers.

We are not advocating for its removal, but we have recommended there be a lower buffer for first home buyers.

The 3 per cent serviceability buffer is too rigid. APRA admits as much when it says it is not “appropriate for every lending decision”. The exemption process from the buffer is barely used and sits at about 5 per cent of new housing loans in the past year.

This “one-size-fits-all” approach is particularly onerous for first home buyers. It also prevents existing borrowers from refinancing their home loans at better rates and creates “mortgage prisons”.

Bendigo and Adelaide Bank said there was a “proportion of prospective first home buyers failing serviceability tests and not being able to enter the housing market despite being able to meet repayment obligations at current rates”.

This is not right.

With first home loans sitting around 10 per cent of loans in most major banks, it would not be a system-wide change but a deft, laser-like change for prospective first home owners.

Unfair advantage

Third, we found the capital risk weightings system deployed by APRA does nothing to help first home owners and can fail to reflect the actual risk of first home mortgages.

Many Australians rely on lenders mortgage insurance (LMI), which insures the broker, to obtain a first mortgage.

The committee heard evidence that the risk weighting applied to first home mortgages with LMI is disproportionate when compared to the weighting for loans using parental guarantee, for example.

The risk weight applied to LMI is 55 per cent, but with a parental guarantee that weighting falls to 35 per cent.

This gives an unfair advantage to Australians accessing the bank of mum and dad through cheaper mortgages, whereas those using LMI are paying a higher price despite there being comparable risk protection.

Where the underlying risk is the same, the capital requirements should be equal.

Changes such as these could result in 50,000 more first home buyers annually.

These are the sort of practical and responsible solutions to open the door for first home buyers.

As the Australian Housing and Urban Research Institute points out, Australia has vacated the policy space on using financial regulation to drive home ownership. It is time we had one.

Andrew Bragg is a Liberal senator for NSW, and Coalition spokesman on home ownership. He is chairman of the Senate Economics Committee. The committee’s report “Financial regulatory framework and home ownership” will be tabled in Canberra on Thursday.