What is the serviceability buffer?

The serviceability buffer is a safety margin lenders add to your interest rate when they test whether you can afford a home loan. The Australian Prudential Regulation Authority (APRA) expects lenders to assess a new borrower’s ability to repay at an interest rate at least 3 percentage points above the actual loan product rate. So if a loan is advertised at 6 percent, the lender checks that you could still meet repayments at around 9 percent. That extra 3 percent is the serviceability buffer, and it shapes how much you may be able to borrow.

The buffer matters most when you refinance, because the lender re-runs that same test against your current income, expenses and debts. Understanding how it works helps you set realistic expectations before you apply.

Why the serviceability buffer exists

The buffer is a contingency. It gives you breathing room if something changes after you take out the loan. According to APRA, those shocks can come from a range of sources, including a reduction in your income, an increase in your expenses, an unforeseen illness, or a change in the broader economy such as higher interest rates, higher inflation or a weakening labour market.

In other words, the test is not designed around today’s rate alone. It checks that your repayments would still be manageable if rates rose or your circumstances shifted. This is why two people on the same income can be offered different amounts, depending on their expenses and existing commitments.

How much is the buffer, and where does it come from

The current serviceability buffer is 3 percentage points above the loan product rate. APRA confirmed on 29 July 2024 that the mortgage serviceability buffer would be kept at 3 percentage points, citing the uncertain economic and interest rate outlook and the possibility of higher cost-of-living pressures.

The 3 percent figure is not new. In October 2021, APRA raised the minimum serviceability buffer from 2.5 to 3.0 percentage points above the loan product rate, in an environment of high household debt and rising higher-risk lending. It has stayed at 3 percentage points since.

The buffer applies on top of the loan rate, which itself moves with the broader rate environment. The Reserve Bank of Australia (RBA) sets the cash rate target, and that influences the interest rates banks offer on home loans. When the cash rate changes, product rates often follow, and the assessment rate (the product rate plus the buffer) moves with them.

The APRA buffer and refinancing

Here is the point that catches many people out. When you refinance, the new lender assesses you against the assessment rate, not the lower rate you are switching to. So even if you are moving to a cheaper loan, you still need to show you could service the new loan at roughly 3 percentage points above its rate.

If you want to refinance and the buffer is tight, options may include reducing other debts, extending the loan term, or staying with a lender that views your situation more favourably. What works depends on your full position. You can read more on our home loan refinancing page about how the process runs from start to finish.

The 3 percent buffer in plain numbers

To picture the 3 percent buffer, take a loan advertised at 6 percent. The lender does not test you at 6 percent. It tests you at about 9 percent, then works out the repayment at that higher rate and checks it against your income and expenses. The repayment you actually pay is based on the real product rate, but the approval decision is based on the buffered rate.

This is also a sensible way to stress-test your own budget. MoneySmart suggests being realistic about what you can afford and calculating what your costs would be if interest rates went up by 2 percent, to give yourself some breathing room. Running your own numbers at a higher rate before you apply gives you a clear sense of where you sit.

What lenders look at alongside the buffer

The buffer is one input. When assessing a loan, a lender also weighs up your income, your regular expenses, and your existing debts and credit commitments. A higher assessment rate reduces the maximum repayment a lender will accept, which in turn caps how much you may be able to borrow. You can read how lenders work out that capacity in our explainer on Borrowing power first home buyer, and how rate movements feed into it in Interest rates first home buyer.

If you are switching loans, the costs of the move also matter to the overall picture. MoneySmart lists costs to weigh up before refinancing, including a break fee on a fixed rate loan, a discharge or termination fee, an application fee on the new loan, and possible stamp duty. MoneySmart also suggests telling your current lender you plan to switch to a cheaper loan, and notes that having at least 20 percent equity in your home gives you more to bargain with.

You can model the effect of the buffer yourself. The MoneySmart mortgage calculator lets you work out repayments and how much you may be able to borrow, and explore the effect of a higher or lower interest rate on your repayments. It also helps to understand the headline figure on any loan, which we cover in Comparison rate explained, and how your deposit size feeds into the equation in What is lvr first home buyer.

How to plan around the serviceability buffer

A few practical steps can put you in a stronger position before any assessment:

None of this guarantees an approval. It simply gives you a clearer view of what may be possible and removes some of the guesswork.

Frequently asked questions

Talk it through with the team at Finance Lab

If you are weighing up a refinance and want to know where the serviceability buffer leaves you, the team at Finance Lab can run your numbers and explain your options against current lender criteria. Get in touch and we will help you work out what may be possible for your situation.