Could a lower mortgage serviceability buffer help Aussie homebuyers and refinancers?

The federal opposition has revealed that, if elected, it will work with Australia’s prudential regulator to relax the mortgage serviceability buffer, in an attempt to provide first homebuyers easier access to loans. This move might also give current mortgage holders greater capacity to negotiate new loan terms and refinance.

What is the mortgage serviceability buffer?

The mortgage serviceability buffer, currently sitting at 3 per cent, is a rule that requires lenders to check if borrowers can still afford their repayments if interest rates were to increase. It’s designed to make sure people aren’t stretched too thin if rates rise, and to protect lenders against too many borrowers defaulting on loans.

Before the Reserve Bank of Australia (RBA) started cutting the cash rate in mid-2019, the buffer was set at 2 per cent. As rates began to rise, it was bumped up to 2.5 per cent and eventually landed at 3 per cent in October 2021.

The buffer is set by the Australian Prudential Regulation Authority (APRA) – an independent body that ensures banks lend responsibly and can withstand future economic shocks.

Is the buffer too high in 2025?

Shadow Housing Minister Michael Sukkar seems to think so. Given that interest rates look likely to have peaked and are on the way down, he says that a reduced buffer could give young Australians a leg up when it comes to buying property. 

"I think most Australians could understand a high serviceability buffer when the cash rate was 0.1 per cent during COVID," Sukkar told Radio National Breakfast this week.

"But now that we have elevated interest rates, a serviceability buffer that has not remained flexible with those changes is just blocking first home buyers from entering the market."

The Coalition MP quoted industry estimates that nearly 40 per cent of potential first home buyers are unable to get finance for a loan, and therefore unable to buy a house, primarily due to serviceability restrictions.

“Two-and-a-half per cent is where it was at previously… so we're going to work with APRA in relation to that, as we did, to be frank, in the former Coalition government,” Sukkar said.

This is important because borrowing power changes with different interest rates. Using Mozo's mortgage repayment calculator, a household with a $3,500 monthly repayment budget on a 30-year loan could borrow around $455,200 if tested at a serviceability of 8.5 per cent but only $435,000 when tested at 9 per cent. That’s a borrowing capacity difference of $20,200.

This shows that even a small rate change can significantly affect how much you can borrow.

What will APRA do?

In its latest macroprudential update from November 2024, APRA decided to keep its current settings in place, saying that credit is still flowing to both households and businesses, with good-quality borrowers able to access it.

That said, APRA raised a few important points:

• House prices are still 40 per cent higher than they were before the pandemic, even though growth has slowed recently.
• Household debt is high compared to long-term trends and other countries, which could be a problem if things go south economically.
• Non-performing loans are on the rise, and they could continue to increase, especially if unemployment goes up.

APRA said it will keep a close eye on the economic environment and is ready to adjust its policies if needed. A few things to keep in mind:

• APRA is an independent authority that sets the rules around serviceability buffers and other policies – this isn’t something the government decides.
• While the government can influence APRA through mandates and its overall economic framework, APRA still calls the shots.
• For example, the government could ask APRA to consider the impact of its policies on first-time homebuyers or mortgage holders struggling with the cost of living.

What can first homebuyers and refinancers do?

If APRA lowers the serviceability buffer, it could make it easier for borrowers to qualify for a loan, potentially allowing them to borrow more. Here's how it might impact different groups:

• First homebuyers: A lower buffer means banks won’t stress-test loans as much, which could provide a much-needed opportunity to enter the market.
• Refinancers: This could provide more flexibility, especially for those who’ve been locked out of better deals due to tighter lending restrictions. Some might find it easier to switch lenders and secure a lower interest rate, potentially saving thousands over the life of their loan.

While increased borrowing power sounds promising, there are some key considerations:

• Interest rates: They remain high, and if they stay that way for longer than expected, borrowers will need to be confident they can handle repayments in the long run. Just because you can borrow more doesn’t always mean you should.
• Impact on property prices: If more buyers suddenly have access to greater borrowing power, demand for property could rise, pushing prices higher. This is particularly relevant in competitive markets where supply is tight. A similar pattern was seen when APRA last adjusted lending rules – whenever borrowing capacity expands, property values often follow.

So, is now the right time to buy or refinance? 

The decision depends on individual circumstances. It would be sensible for first homebuyers to carefully assess if they’re financially ready to take on a mortgage, while refinancers can crunch the numbers to determine whether switching lenders makes sense. For tailored advice, speaking with a mortgage broker or financial adviser can help you make the best decision.