Australia's financial watchdog has fired off a warning shot to banks granting exemptions to borrowers who don't meet interest rate buffers.
Australian Prudential Regulation Authority chair John Lonsdale has released a letter urging banks to maintain minimum home loan serviceability criteria.
This includes the three per cent buffer that's designed to protect a borrower if their financial circumstances change.
"With the potential for interest rates to rise further, inflation still high and the possibility of weaker labour market outcomes, the buffer is an important risk mitigant," Mr Lonsdale wrote.
The letter was directed at banks that have been granting exemptions to borrowers unable to refinance to a lower rate because of strict serviceability rules.
The regulator said banks can use exceptions but they needed to be used sparing and managed carefully to make sure borrowers were in a sound position, such as a good repayment history.
"Large volumes of exceptions can create risks by weakening banks’ risk profiles and increasing the vulnerability of their loan books to future shocks," Mr Lonsdale warned.
At an economic outlook forum hosted by Sky News, Prime Minister Anthony Albanese acknowledged the pressure mortgage holders were under from rising interest rates.
But he was optimistic about Australia's economic prospects and its ability to dodge a recession.
The prime minister also hit back at the suggestion the next round of workplace reforms will weigh on already sluggish productivity.
Mr Albanese defended his government's resolve to crackdown on the use of labour hire as a tactic to pay workers less.
Major employer groups have joined forces to oppose the "same job, same pay" changes.
The government, which is still consulting on the reforms, wants to close a loophole that allows companies that have negotiated a pay rate with their workers to then pay labour hire contractors less for the same job.
Employer groups argue the changes could take away the incentive to attract higher rates for working harder, limiting the productivity of the labour force.
The prime minister said the business groups' arguments were not grounded in fact.
"No one's arguing that people shouldn't be rewarded for their experience and in their capacity at all," he told an economic outlook forum hosted by Sky News.
He said the problems were not reflected in the ongoing discussions the government was having with employers.
