Can a Lower Serviceability Buffer Help More Australians Buy a Home?

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Can a Lower Serviceability Buffer Help More Australians Buy a Home?

If you’ve ever applied for a home loan, you’ve probably wondered about the “serviceability buffer.” It’s a key factor that lenders use to assess whether you can afford your mortgage, not just today, but if interest rates rise in the future. But what exactly is this buffer, and could lowering it help more Australians enter the property market?

Currently, the Australian Prudential Regulation Authority (APRA) requires lenders to apply a 3% serviceability buffer. This means that if you’re applying for a loan with an interest rate of 5%, the bank will assess your ability to repay the loan as if the rate were 8%. The idea is to ensure that borrowers can handle potential rate increases over the life of the loan.

This buffer was increased from 2.5% to 3% in October 2021, in response to concerns about rising household debt and the potential for interest rate hikes. APRA’s goal was to reinforce the stability of the financial system by ensuring that banks lend to borrowers who can afford their loans both now and in the future.

However, this higher buffer has made it more challenging for some Australians to qualify for home loans, particularly first-home buyers and those with lower incomes. By assessing borrowers at a higher interest rate, the buffer effectively reduces the amount they can borrow, potentially putting home ownership out of reach.

Recent research commissioned by the Finance Brokers Association of Australia (FBAA) and conducted by CoreData suggests that lowering the buffer back to 2.5% could have a significant impact. The study found that such a reduction could increase national borrowing capacity by $276 billion and enable approximately 268,862 more Australians to access median home loans.

This change would be particularly beneficial for younger buyers aged 25–34, with an estimated 119,000 more individuals in this age group potentially qualifying for loans. Additionally, nearly 400,000 first-home buyers using a 5% deposit could see the largest gains in access to loans under $900,000.

Peter White, FBAA’s managing director, has called on both major political parties to commit to reducing the buffer, noting that the Coalition has already expressed support for the move. He argues that many people who can afford to service these loans are currently being excluded from the market due to the stringent buffer requirements.

However, not everyone agrees that lowering the buffer is the right approach. APRA has maintained its stance, citing the potential for further interest rate rises, high inflation, and risks in the labour market as reasons to keep the buffer at 3%. The regulator believes that the buffer provides an important contingency for a range of economic shocks over the life of the loan.

Some experts also warn that reducing the buffer could lead to increased house prices, as more people gain access to credit and compete for limited housing stock. This could inadvertently reduce affordability, particularly for those who are already struggling to enter the market.

For current mortgage holders, the high buffer has created a situation known as “mortgage prison,” where borrowers are unable to refinance to a lower interest rate because they can’t meet the stricter serviceability assessments. This has left many Australians paying more than they need to on their home loans.

Some banks have started to use discretion in these cases, offering exceptions on a case-by-case basis under certain conditions. Engaging a mortgage broker and improving financial health may increase the chances of escaping mortgage prison.

While the serviceability buffer plays a crucial role in maintaining financial stability, there’s a growing conversation about whether the current 3% rate is too restrictive. Lowering it to 2.5% could unlock home ownership for hundreds of thousands of Australians, particularly younger buyers and first-home buyers. However, any changes must be carefully considered to balance the benefits of increased access to credit with the risks of potential market overheating.

If you’re navigating the complexities of home loans and serviceability assessments, it’s essential to seek professional advice tailored to your individual circumstances. A mortgage broker like Annette Tothill can help you understand your options and find a solution that aligns with your financial goals.