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About the home loan buffer

According to big banks, a home loan buffer is the amount of money borrowers have put aside so that they can maintain mortgage and loan repayments if and when their financial circumstances change. And, as we know from COVID-19, circumstances can change without us having any control over them.

About the home lenders’ borrowing buffer

In a recent media release the APRA – Australian Prudential Regulation Authority, an independent statutory authority that supervises institutions across the banking sector – has advised it expects they [home loan lenders] will assess new borrowers’ ability to meet mortgage repayments at an interest rate that is at least 3 percentage points above the loan product rate.

This “serviceability buffer” is up from the current buffer of 2.5 percentage points used today and the increase applies to all new borrowers.

How will this impact borrowers?

It is expected that the impact of a higher serviceability buffer is likely to be larger for investors than owner-occupiers.

This is because, on average, investors tend to borrow at higher levels of leverage and may have other existing debts (to which the buffer would also be applied).

Along with other serviceability criteria, this could reduce the maximum borrowing capacity for the typical borrower by around 5 percent.

Reference: APRA Media Release (read full release here)