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Home Loan Serviceability Buffer remains at 3%

Home Loan Serviceability

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Australian Prudential Regulation Authority (APRA) confirmed the home loan serviceability buffer will remain at 3%.

“Under APRA’s prudential framework, banks must apply certain minimum criteria when assessing a borrower’s repayment capacity. This includes a 3 per cent minimum serviceability buffer, to be applied above the housing loan interest rate. “

APRA and the RBA believe as households are facing increased pressure due to higher inflation and higher interest rates an interest rate buffer of 3% remains appropriate.

What Is the Home Loan Serviceability Buffer?

APRA requires all lenders to maintain a home loan serviceability buffer of 3%. This buffer means a lender will assess all loans at a rate of your current interest rate plus 3%. If your current interest rate is 6% the bank will assess your home loan affordability at your interest rate of 6% plus a buffer of 3% meaning your assessment rate is 9%.

The buffer is an allowance made by banks to protect borrowers from future interest rate rises.

Why did APRA keep the status quo?

Mortgage Broker What If We Finance believes APRA maintained the buffer at 3% to ensure people do not borrow beyond their means and considered all economic factors like cost of living and future economic shocks. The buffer acts as a way of reducing borrowing capacity.

Does this impact your home loan borrowing power?

What If We Finances believes the a 3% buffer further limits your borrowing power and makes lending more challenging for some borrowers. Home loan affordability and the loyalty tax is a key issue and if you are coming off a 1.89% fixed interest rate the buffer has a large impact on borrowing power.

For new borrowers this means with a given income you can borrow much less. A 3% buffer on a home loan for a couple with no children and no other debts and a join income of $120,000 can reduce borrowing power by $150,000. So while this protects you from rising interest rates if we are at the top of the interest rate cycle does a 3% buffer really make sense?

How does What If We Finance help you?

Mortgage Broker Melbourne What If We Finance can help you negotiate the impact of buffers.

  • If you are refinancing some lenders do not apply a 3% buffer. Some lenders can go as low as 1% if you have a good credit history and are refinancing your home loan. This is especially handy if you are coming of a fixed rate.
  • Lenders calculate borrowing power using different rules and depending on your circumstances borrowing power can vary significantly. Borrowing power can vary as much as $90,000 between lenders for a couple earning $120,000 and no debts

As an independent mortgage broker we offer impartial advice and guidance to help you find an unbeatable. With access to more than 2,000 home loan products and 42 lenders we can find finance to suit your situation.
Contact us today to find out more.

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