First home buyers should be able to borrow more money to get a home loan, according to a federal inquiry into home lending, which is expected to recommend the government ease restrictions on how much banks can lend out.
The ABC understands the inquiry, headed by Liberal Senator Andrew Bragg, will in its final report recommend that the nation's banking regulator, the Australian Prudential Regulation Authority (APRA), be given a new mandate to specifically consider the plight of borrowers when setting policies about how much banks can loan out.
And it is expected to recommend the banking code be modernised so there's more flexible ownership options for first home buyers, including potentially allowing parents being on the title of their child's property, or other options for non-family co-ownership of property.
Currently APRA's mandate is to protect financial stability by focusing on whether lenders are taking on too many risky loans rather than considering what impact its policies have on borrowers.
The inquiry is expected to recommend that APRA's mandate be changed to include specific obligations to consider the impacts of its policies on first home buyers.
The inquiry heard evidence that as the Reserve Bank started increasing interest rates in May 2022, more first home buyers have been unable to access finance.
One of the ways lenders are restricted from allowing Australians to take on too much debt is that, when they assess a borrower for a home loan, they must consider whether that person can meet repayments for the loan at a higher rate.
Currently, the serviceability buffer set by APRA is 3 per cent.
That buffer means that if today, you go to a lender and they offer you a variable rate of 6 per cent, the lender will be assessing your ability to repay the loan at 9 per cent.
[VIDEO THE BUSINESS]APRA has said the buffer should remain at 3 per cent
Earlier this week APRA chairman John Lonsdale rejected calls from some of the big banks, mortgage brokers, property groups and peak industry bodies to reduce the mortgage serviceability buffer, confirming it will remain at 3 per cent.
Mr Lonsdale has said that there's already some scope for banks to use lower buffers in certain circumstances.
He said "in reaching the decision to keep the settings steady, APRA took account of high household indebtedness and a pick-up in credit growth, persistent cost-of-living pressures, a weakening jobs market and heightened geopolitical risks".
"Although house price growth has eased, prices are still 40 per cent higher than before the pandemic and household debt is high relative to incomes both compared with long-term trends and relative to international peers," Mr Lonsdale said.
"This high household debt is a key vulnerability if adverse economic scenarios came to pass."
Mr Lonsdale said the regulator had already seen an uptick in non-performing loans, with the potential for further increases in bad loans, especially if unemployment increases.
But as housing affordability shapes up to be a big election issue, changes to lending rules to help first home buyers access finance could be a policy that the Coalition takes to the federal election.
Senator Bragg said he believed "APRA's rigid application of the 3 per cent serviceability buffer disproportionately impacts prospective first home buyers."
The inquiry heard from groups including two of the big four banks that mortgage availability has become heavily skewed towards high income earners and the wealthy.
ANZ and National Australia Bank had told the inquiry there’s a case to ease the buffer to improve access to the housing market.
They are backed by the nation's banking lobby, the Australian Banking Association, and some mortgage brokers and property groups.
But others, including the nation's biggest bank CBA, and other big four bank Westpac, think the buffer should stay where it is.
Consumer groups including Financial Counselling Australia and Mortgage Stress Victoria also told the inquiry that increasing the buffer could create too much 'risk' and leave Australians more vulnerable to getting into too much debt and losing their homes.
Senator Bragg has said there cannot be a completely risk-free system and that evidence given to the inquiry from Housing Indusrty Association (HIA) and others suggested home ownership rates are declining, while the share of Australians renting is increasing.
"The 3 per cent buffer was implemented when the official cash rate was 0.1 per cent, but evidence provided to the committee suggested this may be excessive as we reach the likely top of the tightening cycle," Senator Bragg told ABC News.
The Finance Brokers Association of Australia (FBAA) has called on the federal government to force the regulator to reduce the buffer rate despite APRA wanting it to stay at 3 per cent.
George Samios, a mortgage broker in Brisbane who is also a member of the association, told ABC News that many of his clients were finding it hard to get a home loan due to due to high interest rates and the 3 per cent buffer.
"It's just keeping the people in the rental cycle paying someone else's mortgage, and it makes them feel quite frustrated," he said.
Mr Samios said rather than "penalise first time buyers", with a 3 per cent buffer, it should be lowered to 1.5 to 2 per cent.
"That'll mean more first-time buyers can get out of renting and actually own a house," he said.
"On two average incomes, people can't get a normal house in Australia.
"We're telling people they can only afford to buy a two-bedroom unit, whereas these people want to buy a house, and lowering that buffer rate means they can get that house."
Mr Samios said the buffer should be lowered for all borrowers, not just first-time buyers.
"Aussie families right now are feeling the pinch big time, and they're currently mortgage prisoners," he said.
Call to lower 'risk weights' banks place on first home buyers
To avoid masses of Australians defaulting on their mortgages, there's also restrictions on how much capital banks need to hold in reserve to balance against the risk of those loans not being paid back in full.
These restrictions became more stringent after the global financial crisis (GFC), as Australia's financial market and banking regulators worked to reduce "risk" in the system.
The inquiry heard that risk weights applying to first home mortgages with Lenders Mortgage Insurance (LMI) were "excessive", when compared to the risk weighting applied to parental guarantees.
It noted that for many Australians, LMI is the only way they can access a mortgage, particularly in situations where a parental guarantee isn't available.
The inquiry will likely recommend the government require APRA to prepare prudential guidelines allowing lenders to have lower capital risk weightings for first home mortgages in certain circumstances.
Senator Bragg said the capital risk weighting system "makes many first home mortgages more expensive than they ought to be".
"A parental guarantee is provided with a large discount, which is not available to a mortgage protected by lenders mortgage insurance," he said.
"These capital risk weights unfairly preference Australians with access to the 'bank of mum and dad."
Jonathan Mott, a banking analyst and founding partner of financial services firm Barrenjoey, had told the inquiry that APRA should consider rebalancing risk weights to give an advantage to younger borrowers.
A lower risk weighting would be applied for first-home buyers who borrow to build or buy off-the-plan, which would drive down the interest rate charged to younger customers.
Barrenjoey's modelling suggested that if you reduce the amount of capital that the bank must hold against first-home buyers by 30 per cent, it will reduce the interest rate the first-home buyer pays by 0.29 per cent.
Over the 30-year life of the loan this would save first-home buyers buying new homes about $37,300 in interest on a $600,000 mortgage.
Its modelling also suggests that these potential changes to mortgage risk weights would also lead to a small increase in borrowing capacity for first-home buyers of about 1 per cent to 3 per cent.
Given the pent-up demand by first-home buyers to enter the housing market, Barrenjoey estimates an increase of 30,000 to 50,000 new first-home buyer loans per annum could be possible over coming years, subject to an increase in housing supply.
Call for more flexible home ownership options
The inquiry also heard evidence that more flexible ownership options for first home buyers, whether through parents being on the title of their child's property, or other options for non-family co-ownership of property.
The inquiry is expected to recommend more opportunities for first home buyers to enter the property market.
It will likely recommended the government consults with banks about options for modernising the Banking Code of Practice to facilitate lending in co-ownership scenarios.
The Greens have argued against any changes to mortgage serviceability buffers and are likely to have a dissenting report.
Greens Senator Barbara Pocock has said that if the banks really want to help first-home buyers, they could consider not charging them mortgage insurance.
She had said that reducing the buffer would "boost the profits of banks while piling up risk and hazard for some of the most vulnerable people buying a house in the Australian community".
Senator Pocock thinks a better solution to the housing crisis is to phase out property tax breaks for investors, find affordable supply of housing and protect renters.
The inquiry's deputy chair, Labor Senator Jess Walsh, has been contacted for comment.
