As the name implies, the serviceability buffer provides a contingency - or buffer - to give borrowers a fair chance of continuing to meet their home loan repayments if financial circumstances change, such as if interest rates were to rise.

The buffer is a set figure expressed as a percentage - currently 3% (as at December 2024) - that a lender must apply on top of a loan's interest rate when it's determining whether a borrower will be able to meet their repayments on the home loan they've applied for.

In simple terms, if a borrower is applying for a home loan with an interest rate of 6% p.a., the lender must assess the borrower as if they were to pay an interest rate of 9% p.a.

Who sets the serviceability buffer?

Australia's serviceability buffer is set by the national banking regulator, the Australian Prudential Regulation Authority (APRA). It was introduced in December 2014 when Australian property prices were rapidly escalating and households held high levels of debt.

At the time, APRA introduced a minimum serviceability buffer of 2% on new loans in a bid to reduce medium-term risks to Australia's financial stability. The regulator was concerned rising interest rates could see too many borrowers default on their home loans, triggering wider economic consequences.

Since then, APRA has regularly reviewed its mandated serviceability buffer. It was last changed in October 2021 when it was raised from 2.5% to 3%. During that period, Australia's cash rate - the benchmark used for setting home loan interest rates - rose from 0.1% to 4.35% between mid-2022 and late-2023.

How is the serviceability buffer applied to my home loan?

When you apply for a loan, banks take into account many factors including your income, living expenses, and any existing debt and measure this against the size of the home loan you're asking for. As part of their calculations, they're required to assess whether you'd be able to make your repayments if interest rates or your financial circumstances were to change.

The serviceability buffer is added on top of the rate of the loan product you're applying for. It sees you assessed as if you'd be required to pay an interest rate 3% higher than the one you'd actually need to pay.

This can effectively rule some applicants out and has prompted some banks to criticise the serviceability buffer, saying it locks some people out of the housing market, particularly first home buyers and lower-income applicants.

Which lenders apply the serviceability buffer?

APRA's serviceability buffer applies to banks, credit unions, and building societies, collectively known as authorised deposit-taking institutions (ADIs). However, APRA doesn't regulate non-bank lenders, which instead fall under the regulatory framework of the Australian Securities and Investments Commission (ASIC).

See also: Are non-bank lenders safe?

ASIC requires its credit licensees to observe responsible lending obligations. Non-bank lenders must still observe serviceability buffers in their assessments. However, they tend to have more flexibility in setting buffer rates, but typically only when other conditions are met.

Is there any flexibility in the serviceability buffer for banks?

APRA makes some provisions for banks to waive or reduce the serviceability buffer in certain circumstances, effectively allowing them to assess home loans on a case-by-case basis. A so-called 'exception to policy' can occur when a bank decides to approve a home loan that doesn't meet its standard criteria which can include the serviceability buffer.

Such exceptions are permitted under APRA regulations as long as they are "limited and managed prudently". In some cases, banks can choose to consider other indicators of a borrower's capacity to pay back a home loan. This may include a good repayment history or a large deposit. In the past, APRA has estimated serviceability exceptions accounted for around 2% to 3% of total lending for housing, but this rose to around 5% in 2024.

Meanwhile, ASIC's responsible lending guidelines state it may be reasonable to relax the buffer for cases of like-for-like refinancing if a customer's new financial obligations can reduce their current repayment schedule and improve their overall financial position. In these cases, some non-bank lenders may apply a buffer as low as 1%, although others will be guided by their own internal lending policies.

What do banks say about the serviceability buffer?

The serviceability buffer has been the subject of debate among Australia's banks in the decade since its introduction. While major lenders agree it's well-intentioned, there have been regular calls to reduce the buffer to allow more borrowers to access finance.

As part of a 2024 Senate inquiry into Australia's financial regulatory framework, National Australia Bank called on APRA to lower the buffer rate as part of a suite of changes to make it easier for first home buyers to enter the market.

ANZ CEO Shayne Elliott has also been a critic of the serviceability buffer, telling the inquiry it was "absurd" banks had to apply a 3% buffer when making home loan serviceability calculations but weren't permitted to factor in a likely increases in incomes for many young professional applicants.

He said lending regulations were increasingly "locking out" middle Australia from being able to access credit.

Mr Elliott also noted ANZ's borrowers were becoming increasingly wealthier, partly because the serviceability buffer was making it harder for lower- to middle-income earners to prove they could handle a larger mortgage.

But not all the big banks were in agreement. In its submission, Westpac said the current financial regulation settings were "not a major inhibitor to home ownership and should not be a focus of policy debate".

Australia's biggest home lender, CommBank, also took a more cautious approach in its submission to the inquiry, saying any changes to the current regulatory framework "must be balanced with the current performance of mortgage holders in this higher interest rate environment".

See also: APRA upholds serviceability buffer amid first home buyer challenges

What can borrowers do to meet the serviceability buffer?

If you're applying for a mortgage and find yourself on the wrong side of the serviceability buffer, there are a number of ways you can try to increase your home loan serviceability. These include:

  • Increasing your income: While this can mean finding better paid employment, it can also entail taking on ongoing part-time work or creating a regular income stream from a side gig (although not all lenders will be willing to consider all side gigs as steady income).

  • Cutting expenses: This is arguably a more achievable option. It entails reviewing all your living expenses and cutting unnecessary spending.

  • Reduce debt: This can also be effective in improving your chances of meeting serviceability requirements. If you're paying a car loan, look to sell and downgrade to a cheaper vehicle, preferably one you can pay for outright. Paying off any high-interest credit card debt is also a must.

See also: Helpful guides on how to increase your borrowing capacity

  • Use a mortgage broker: A mortgage broker can help match you to a lender who may be willing to look upon your financial circumstances more favourably and apply a lower serviceability buffer in assessing a home loan application.

See also: How to find a mortgage broker

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