We announced just recently that both the Australian Prudential Regulation Authority (APRA) and Australia’s Treasurer, Josh Frydenberg, had expressed their concerns about the high levels of household debt relative to income levels, and this is exactly what has happened. APRA has announced that from the end of October, the serviceability buffer, which dictates the rate that banks and Australian lenders must assess loan applications on would rise from 2.5 to 3.0%.

This may not sound like too much, and it’s unlikely to have too much of an impact on Australian expats, given that income levels amongst expats tend to be higher on average, and it is much about identifying lenders that will accept up to 100% of their foreign income, but it is expected to reduce borrowing capacity to residents by up to 5%. This means that if you could borrow $1 million previously, once the new rules are in place, this will be reduced to approximately $950,000, which, in a hot property market could be a meaningful difference for some buyers.

How does the buffer rate work exactly?

We outlined how the buffer rates apply previously when a reduction was implemented back in 2019, but for this change, the buffer rate is being increased. This means that if a bank’s starting variable rate is 2.0%, then they must now add 3.0%, instead of 2.5%, resulting in a serviceability assessment rate of 5.0%, rather than 4.5%. This is the rate that the bank or Australian lender must be comfortable that you can afford the loan repayments at.

You might be wondering why the buffer rate is so high, given that interest rates are in the high 1’s and low 2’s at this current point of the cycle and are expected to remain low for the short to medium term. The reason this buffer rate is used is that the bank is providing you with a 30-year loan in many cases, and it is very likely that interest rates will not remain at these record low levels for the full 30-year loan term, although I’m sure many borrowers would be happy if they did.

Long-term interest rates sit between 6 – 7%, and it is widely expected that over the medium to long-term, interest rates will start to revert back towards these long-term average levels.

What should prospective borrowers do?

If you’re looking to refinance a home loan, purchase an investment property, or get a pre-approval with the view to buying your own home, it may just be a wise time to start the ball rolling now. It is widely expected that this increase in the serviceability buffer rate will not be the only change that APRA implements to reduce household indebtedness, which may make it even more difficult to secure your loan.

If you’d like to explore what the increase in the buffer rate means for you and how it might impact your borrowing capacity, or look at what you could secure as a pre-approval, reach out to our team at Loansuite today for a discussion.


LoanSuite Pty Ltd is your lending partner for all of your home loan, investment property, business, and commercial financing needs. With our wide range of lending solutions, expertise in financial planning and investment strategies, and extensive experience in working with both Australian residents and Australian expats, we are your partners for your lending needs.

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LoanSuite Pty Ltd is an Authorised Credit Representative (Credit Representative Number – 494608) of My Local Broker (Australian Credit License – 481374). Important Disclaimer: Your complete financial situation will need to be assessed before acceptance of any proposal or product.