WHAT’S A SERVICABILITY BUFFER AND HOW WILL IT IMPACT YOUR ABILITY TO BORROW?

Over the past few months, we’ve been hearing more about serviceability buffers and how they might impact home buyers’ ability to borrow. However, many people don’t understand what a serviceability buffer is and how it works. Simply put, a serviceability buffer is the minimum interest rate a lender is expected to use when assessing a loan application.
 
Lenders look at a borrower’s income and expenses to determine how much capacity they have to borrow. On top of this, they take into account the potential interest rate payments both now, and in the future. They do this by applying a serviceability buffer over and above the minimum monthly payment, based on current interest rates.
 
The body that implements these serviceability buffers on banks and lenders are known as The Australian Prudential Regulation Authority (APRA). APRA are an independent Government Agency that sets the serviceability buffer requirement and also implements other measures aimed at helping maintain the stability of property. Other measures APRA looks at include limits on debt-to-income ratios or LVRs.
 
Recently, APRA announced that it would be increasing the serviceability buffer of home loan applications from 2.5% to 3%. This effectively means borrowers will be able to access less money and have a smaller borrowing capacity. APRA estimates the 50 basis points increase in the buffer will reduce maximum borrowing capacity for the typical borrower by around 5%.
 
With interest rates at record low levels, the belief is that the RBA will eventually raise interest rates, however, at this stage, they have indicated that this might not happen for some time. Raising serviceability buffers are a way to reduce the overall level of lending and also cool property markets that have been running hot, particularly along the East Coast of Australia.
 
Higher serviceability buffers generally impact investors more than owner-occupiers, given they often carry higher debt loads. The last time serviceability buffers were introduced were during the most recent property boom on the East Coast in 2015, which lead to a slowdown in house price growth.
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