3% Mortgage Serviceability Buffer to Remain

The mortgage serviceability buffer is a key regulatory measure designed to safeguard the financial stability of borrowers and the broader housing market. Introduced by financial regulators, this buffer ensures that lenders assess a borrower’s ability to repay their loan under potential future financial stress. The 3% serviceability buffer is one of the most widely used benchmarks globally, and its implication are significant for both lenders and borrowers.

What is the 3% mortgage serviceability buffer?

The 3% mortgage serviceability buffer refers to the margin added to a lender’s interest rate when assessing a borrower’s loan repayment capacity. For example, if the current interest rate for a loan is 5%, the lender will evaluate whether the borrower can afford repayments at 8% (5% + 3%).

This buffer is not the actual interest rate borrowers pay but an additional margin used solely for the assessment process. Its purpose is to ensure that borrowers can withstand potential interest rate rises during the loan term, reducing the risk of financial hardship and loan defaults.

Why was the 3% buffer introduced?

The introduction and application of a serviceability buffer address two primary concerns:

Interest rate volatility: Interest rates are subject to fluctuations driven by economic conditions, inflation, and central bank policies. A buffer ensures that borrowers can manage their loan repayments even if rates increase significantly.

Financial stability: During periods of rapid property market growth, lax lending standards can lead to excessive borrowing. The buffer acts as a counterbalance, preventing borrowers from overextending financially.

Implications for borrowers

Reduced borrowing capacity: The 3% buffer effectively reduces the maximum amount borrowers can access. For instance, a borrower who qualifies for a $600,000 loan at a 5% interest rate may only qualify for a smaller amount when the buffer is applied.

Encouraging prudence: By limiting borrowing capacity, the buffer discourages borrowers from stretching their finances too thin, fostering more sustainable borrowing practices.

Challenges during rate hikes: In rising interest rate environments, the buffer becomes a critical safeguard. However, some borrowers may find themselves unable to refinance or access additional credit if they fail to meet serviceability assessments under the stricter buffer conditions.

Despite strong calls from mortgage brokers, aggregators and peak industry bodies to reduce the mortgage serviceability butter, The Australian Prudential and Regulation Authority (APRA) has advised the buffer will remain at 3%.

Contact the team at Provide Finance to discuss your borrowing options.