Why APRA's 3% serviceability buffer is back in the news

The Coalition has pledged to overhaul the rules governing how banks assess borrowers by slashing the serviceability buffer set by the Australian Prudential Regulation Authority (APRA).

In a joint statement, shadow treasurer Angus Taylor, shadow housing minister Michael Sukkar, and senator Andrew Bragg announced that a Peter Dutton-led government would instruct APRA to lower the buffer if elected on May 3.

"Labor's financial system is locking too many Australians out of home ownership - not because they can't afford a mortgage, but because the rules are too inflexible," the statement read.

"We will make it clear that APRA must consider the impact of its rules on access to housing, particularly for first-home buyers."

What is the APRA serviceability buffer?

The serviceability buffer requires banks to assess a borrower's ability to repay their loan if interest rates were to significantly increase.

Introduced by APRA in December 2014 to mitigate excessive borrowing during a period of low interest rates and high household debt, the buffer was initially set at 2% above the loan's interest rate. For example, a 4% interest rate would be assessed as if it were 6%.

APRA increased the buffer to 2.5% in July 2019 and then to 3% in October 2021, where it currently remains.

How does the buffer affect borrowing capacity?

Borrowing capacity is the maximum amount a lender will approve for a loan.

Lenders determine borrowing capacity by evaluating income against expenses and existing debts, factoring in current and potential future interest rates.

The buffer acts as a mandatory stress test, simulating the impact of higher interest rates on a borrower's ability to repay.

According to Andrew Tauriello, a mortgage broker at Lending Hub Co., the buffer can significantly reduce borrowing capacity, potentially preventing individuals from purchasing a home.

For instance, consider John, who earns $100,000 annually and wishes to borrow $600,000 at 6% to purchase a unit. His monthly expenses, including strata fees, are $2,000. Under different buffer scenarios, John's borrowing capacity would be:

• +3% buffer: $550,000
• +2.5% buffer: $575,000
• +2% buffer: $603,000
• No Buffer: $738,000

"Basically, the lender is calculating the ability to repay the loan as 6% actual interest rate plus 3% buffer, so therefore 9% repayments," Tauriello says.

"So, while the actual repayment would be $2998 per month, they are being assessed to see if they can handle $4024 per month."

Why does the Coalition want to change it?

The Coalition proposes lowering the serviceability buffer to its pre-pandemic level of 2.5%.

Shadow Housing Minister Michael Sukkar argues that the current 3% buffer is "overly cautious," implemented when interest rates were near zero and maintained despite the cash rate exceeding 4%.

"This one-size-fits-all rule is stopping tens of thousands of Australians from getting a home loan - even when they can meet the repayments with a prudent margin against unexpected future rates rises," Sukkar says.

"That's not good regulation. It's a barrier to aspiration."

The Coalition intends to achieve this by amending APRA's mandate, specifically its Statement of Expectations, to incorporate "broader economic objectives."

This proposal aligns with recommendations from the Senate Economic References Committee's November report, led by Liberal Senator Andrew Bragg, which advocated for APRA to develop guidelines tailored for first-home buyers and provide annual impact reports.

Despite this, APRA committed to the 3% buffer in an update late last year. While it admitted the risks of higher interest rates and inflation "had receded somewhat", it would not change its policy due to "uncertainty in the economic outlook".

Who else supports lowering the buffer?

The mortgage and finance industry, including the Mortgage & Finance Association of Australia (MFAA), the Finance Brokers Association of Australia (FBAA), and REA Group (which includes Mortgage Choice and PropTrack), have called for APRA to reduce the buffer.

An MFAA report, based on a survey of 374 mortgage brokers, found that 68% identified serviceability as the primary reason clients were unable to refinance in the first months of 2024.

In its 2025-26 federal pre-budget submission, the MFAA expressed concerns that "serviceability buffers, while essential for managing systemic risk, do not always account for individual borrower circumstances, leading to 'mortgage prisoners' who cannot refinance even when it is financially beneficial."

It proposed a "dynamic buffer that adjusts with interest rates - increasing when rates decrease and decreasing when rates increase."

EMBED: <iframe src="https://omny.fm/shows/friends-with-money/is-it-time-to-refinance-1/embed" width="100%" height="180" allow="autoplay; clipboard-write" frameborder="0" title="Is it time to refinance?"></iframe>

The FBAA welcomed the Coalition's proposal, with Managing Director Peter White urging Labor to match the commitment, emphasising that reducing the buffer is about "common sense," not relaxing lending standards.

The Australian Banking Association (ABA), along with major banks ANZ and NAB, also supports a lower buffer, arguing it would increase borrowing capacity and facilitate home ownership.

"Current obligations for assessing a first-home buyer's serviceability do not account for their strong income growth potential, compared to other borrowers," the ABA's Chris Taylor said during Bragg's senate inquiry.

Who wants to keep the buffer?

However, there is dissent, even within the banking sector.

Westpac and the Commonwealth Bank of Australia (CBA) advocate for maintaining the current buffer.

Martin Green, Westpac's national general manager for property finance, told The Australian in October that increasing borrowing capacity could lead to higher default rates.

"We do not believe that banks or the community should accept higher levels of home loan defaults," Green said. "The 90-day delinquency rate is already higher for first-time buyers at 1.23% compared with the average homeowner at 1.1%."

Around the same period, non-profit group Financial Counselling Australia reported to the ABC that its national debt helpline received over 42,000 contacts in the past financial year, a 10% increase from the previous year, with 30% related to mortgage stress.

The Greens have also condemned lowering the buffer, with senator Barbara Pocock arguing that it would land a lot more first homebuyers in "hot water" when unexpected circumstances arise.

"The Greens object to this proposal, not only because of the devastating human consequences but also because it won't fix the housing crisis. This measure, proposed by Peter Dutton's Liberals, will worsen housing affordability in Australia. It will feed demand in a context of limited supply. Economics 101 tells us this will push house prices up," Pocock said.

"The housing crisis cannot be fixed by reforms which will push up house prices, while the key historic drivers of house price growth are overlooked."

Labor has been more muted on the topic. However, treasurer Jim Chalmers stated in September that the buffer is a matter for the regulator, and while he engages with APRA Chair John Lonsdale, "the setting of the buffer is appropriately a matter for him".

The bottom line

While interest rates are projected to fall, the Reserve Bank left the cash rate on hold in April. With an election around the corner, where it might be won is which major party best addresses the housing affordability crisis without excessively increasing risk in the market.

APRA's serviceability buffer may become a key battleground.

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