The New Interest Rate Buffer: Will it Impact What You Can Borrow?

Australian Prudential Regulation Authority’s (APRA) is the regulator of the financial services industry. Their role is to ensure that Australians don’t fall into financial hardship when economic conditions change. And part of the way that they do that, is by setting a ‘serviceability buffer’ with bank lenders.

The New Interest Rate Buffer: Will it Impact What You Can Borrow?

What is a Serviceability or Interest Rate Buffer?

The serviceability or interest rate buffer was first introduced by APRA in December 2014. It was part of a suite of measures that were put in place to reinforce residential lending standards. In fact, it acts as an extra security measure to make sure that borrowers are able to service (or repay) their loans, even if interest rates change and their subsequent repayments are higher.

Before an institution loans money to a borrower, they will always run scenarios to confirm that the borrower will be able to repay their loans. But with the inclusion of the buffer, they not only confirm that a borrower can repay at current interest rates, but also at interest rates that consider the additional percentage rate of the buffer. This ‘stress test’ gives them confidence to lend and gives the market confidence that loans will be able to be repaid.

Interest Rate Buffer Increases

On 6 October 2021 APRA announced they would be increasing the serviceability buffer from 2.5% to 3%. This measure aims to guarantee new home loan applicants can afford a 3% increase in the future.

APRA’s update to the interest rate buffer has come off the back of recent data showing applicants borrowing more than six times their gross household income. Research by ANZ shows that with accelerating household credit growth and a rise in the demand for loans is expected to exceed household incomes even further. With high household debts, subdued income growth, current low interest rates and high demand for housing, there is a rising risk that new mortgagees may be borrowing more than they can afford. And this may cause problems when interest rates inevitably rise.

With APRA reassessing the interest rate buffer to 3% banks now need to determine whether a home loan applicant can afford loan repayments even if the interest rate was to rise by 3%. So, if you are making a home loan application with an interest rate of 2.89%, your financial institution will now test your ability to make repayments at an interest rate of 5.89%. If they don’t believe you can make these repayments, you will not be offered the loan.

What are the Impacts on What You Can Borrow?

The interest rate buffer changes may seem like the death knell of borrowing for many of us. But the good news is that it can have nil or less than 3% impact on your maximum borrowing levels. This is because the average owner/occupier doesn’t borrow at their full capacity. Additionally, many lenders currently use benchmark (sometimes referred to as floor) rates at higher than the 2.5% buffer. For these reasons, the new buffer won’t always impact on your borrowing capacity.

In addition, the interest rate buffer increase only applies to Authorised Deposit-taking Institutions (ADI) lenders. So, when you apply for lending through non-ADI (or non-bank) lenders, they may not require changes to your serviceability. There are many non-bank lenders available to Australian borrowers who offer packages that are competitive with bank lenders. As such, this is an avenue that’s certainly worth exploring.

Of course, some types of borrowers may feel the change more if they choose to go through an ADI lender. Investors may experience more of an impact because they are more likely to borrow with pre-existing commitments. These pre-existing commitments will also have the increased buffer applied, and this could impact on the full borrowing capacity.

For first-time home buyers, this change could make a small dent in their borrowing capacity. This is particularly true if you have a deposit of less than 10%. If you have already been pre-approved, we recommend a review on your borrowing capacity, just to check in on these changes.

Speak to Our Team of Experts

At Stapleton Finance, we are dedicated to removing the pressures involved in securing finance to buy a house. We have a wide panel of both non-bank and bank lenders. So, we can help you access financing whether you’re an investor, a first-time home buyer or anyone else looking to buy property. Regardless of your situation, we can find the best home loan package to suit your individual needs.

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