FBAA Calls for a Review of the Home Loan "Buffer"

FBAA Calls for a Review of the Home Loan "Buffer" – What Does It Mean for You?

Thinking of buying a home or applying for a mortgage? Then you need to know about the loan buffer – a key factor affecting your borrowing power!

What Is the Mortgage Buffer?

In simple terms, a loan buffer – officially known as the serviceability buffer – is a stress test used by banks and lenders to assess whether borrowers can still afford their mortgage if interest rates rise.

Currently set at 3%, this buffer means that if your loan interest rate is 5%, you must prove you can still repay the loan even if the rate jumps to 8%. This ensures you're financially secure even if rates go up in the future.

This rule was confirmed on 27 February 2023 when the Australian Prudential Regulation Authority (APRA) announced that the 3% buffer remains “appropriate.”

Why Is There a Push to Lower the Buffer?

With interest rates rising rapidly, many industry experts – including the Finance Brokers Association of Australia (FBAA) – are calling for a reassessment of the buffer rate. They argue that the 3% buffer is now too high, making it harder for homeowners to refinance or qualify for better mortgage deals.

FBAA Managing Director Peter White AM warned that many borrowers are turning into "mortgage prisoners" – stuck with their current lender because they can’t pass the inflated serviceability tests, even if they’ve been paying their mortgage on time.

White says, “It’s not the borrowers’ fault that interest rates have surged. But they’re the ones paying the price. More consumers and investors are being impacted by these rate hikes every day.”

He adds that the buffer should be reviewed at least every two years, to ensure it reflects the current economic climate. In a recent public poll, 65.7% supported reducing the buffer, and 70% of brokers said the current buffer could impact Australia's housing market.

Expert Views: Is the Buffer Too Strict?

PropTrack Senior Economist Paul Ryan echoed the concerns, saying, “Many lenders believe the current buffer is too strict and prevents buyers – especially first-home buyers – from entering the market.”

While APRA maintains that the buffer is suitable given the global and domestic economic conditions, experts stress that future reviews must consider housing affordability and market shifts.

Quick Takeaway

In the past, the 3% buffer made sense due to historically low interest rates. But with current rates already high, many believe a buffer of 1.5% to 2% would now be more appropriate.

The industry is calling for greater flexibility and regular reviews to support responsible lending without locking out qualified borrowers.

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