Australia’s banking regulator says it could adjust affordability buffers for mortgage holders if economic conditions shift, as a growing number of pandemic-era homebuyers find themselves locked in an uncompetitive rate and unable to refinance.

Any change in the serviceability buffer, which is used by lenders to help determine an applicant’s borrowing capacity, could free up a cohort known as “mortgage prisoners” who no longer meet lenders’ standards after a string of rate rises.

The Australian Prudential Regulation Authority said while the current buffer was suitable, changed conditions could spark a review.

“Apra closely monitors economic conditions as it continually reviews the appropriateness of its macroprudential settings,” a spokesperson said.

“Should risks to financial stability change, Apra will adjust its macroprudential policy settings accordingly after careful consideration and consultation with other agencies on the Council of Financial Regulators.”

The council includes the banking and securities regulators as well as the Reserve Bank and Treasury.

Home loans written between 2019 and late 2021, when rates were at historic lows, were tested on an applicant’s ability to make repayments at 2.5 percentage points above the lending rate. That buffer was then increased to 3 percentage points.

The official cash rate has shot up by 3.75 percentage points since May last year, meaning many of those borrowers were not tested to meet repayments under current conditions.

There have been growing calls in Australia by financial analysts for the serviceability buffer to be relaxed in a move that would typically support home prices.

But there are competing concerns that any relaxation in lending standards would add to inflation because it would increase available credit – which contrasts with the Reserve Bank policy of rate hikes designed to make credit harder and more expensive to access.

George Boubouras, executive director and head of research at K2 Asset Management, said that overall, the benefits of a looser buffer were greater than the downside.

“I have no problem with the serviceability buffer being relaxed a bit to assist mortgage prisoners, many of whom need to refinance,” Boubouras said.

“All some of these households really need to do is get some cashflow improvement for their household balance sheet to get them through the next couple of years.”

Reserve Bank modelling shows that more than 15% of mortgaged households with variable rates have negative cashflow, which means they are spending more than their income.

Some find themselves unable to renegotiate terms after coming off a fixed-rate period into an uncompetitive variable lending rate, exacerbating their financial position.

While buffers are designed to help protect against customers getting into loans they can’t repay, the downside is that they can push otherwise prudent households into financial distress by limiting their refinancing options.

While interest rates are not particularly high by historical standards, the speed of rate rises is unusual.

Those with a $500,000 variable rate loan, over 30 years, have seen an average increase in monthly payments from just over $2,100 early last year to more than $3,200 now, according to analysis by comparisons site Canstar.

Canstar analysis shows there is a gap of more than 1.5 percentage points in the average variable mortgage rate and the lowest ones on the market.

The Apra spokesperson said banks could move outside buffers for good quality borrowers if they had a justification for doing so.

As at the end of last year, 3% of new lending was written outside the usual serviceability requirements.