Is It Time All Banks Adjusted Their Serviceability Buffer For Home Loans

The Reserve Bank of Australia (RBA) will leave the cash rate steady at 4.1% – which offers some relief to those already facing mortgage repayment increases.

But many money experts are calling for all banks to change serviceability buffers to ease ongoing financial stress for borrowers.

What exactly is a serviceability buffer?

Think of it as a sort of safety net – for both the bank and for you.

It's designed to help ensure borrowers can service their mortgages under a range of scenarios. Some people call it a home loan stress test and that's an apt name.

That's because the assessor is testing whether or not you're capable of meeting repayments of your home loan at the higher interest rate. When you first apply for the loan, the lender looks at your income vs your living expenses and makes a decision about your ability to service the loan repayments, without feeling the choking squeeze of cost-of-living increases.

But because banks tested the ability of new borrowers to meet their loan repayments at an interest rate that is at least 3.0 percentage points above the loan product rate, borrowers who may be in the market for a variable-rate mortgage of around six per cent would be assessed on the basis of being able to afford home loan repayments at nine per cent.

And with standard revert rates for borrowers on fixed-rate terms sitting around eight per cent, the serviceability buffer has been out of reach for many Australians.

Which banks are making the change?

Australia's largest lender has already cut the serviceability buffer it uses when assessing mortgages from 3% to 1% for those who meet the bank's strict criteria.

From 23 June, the Commonwealth Bank of Australia (CBA) introduced an alternate interest rate serviceability buffer of 1% – for some customers.

The alternative buffer servicing rate was introduced to support customers refinancing existing home loan debts.

The move sparked debate about whether the Australian banking regulator should lower the buffer from 3% for everyone – a decision that could it make easier for more borrowers to refinance their home loans as they come off ultra-low rates.

To be eligible for the alternative serviceability interest rate buffer, borrowers who submitted refinance applications from 23 June must also meet the following eligibility criteria:

have a loan-to-value ratio of 80 per cent or less (with no lenders mortgage insurance)
have had their loan for at least 12 months
Undertake a full income, expense, and liability verification
refinance a home loan amount that is no greater than their existing loan plus the higher of notional $10,000 or 1 per cent of the amount being refinanced to cover fees and/or payout of existing loan/payment cycle
borrowers must not have any delinquencies for the last 12 months (across any CBA loan product and across all lenders) and must not be servicing a guarantor/property share loan, a bridging loan, a construction loan, or debt consolidation loan.

People with Government Guarantee Scheme loans and additional top-ups or cash out requests are also excluded.

CBA’s move to drop serviceability buffers (in exceptional cases) followed a similar move from Westpac and its subsidiaries (Bank of Melbourne, St.George Bank, and BankSA).

Will other banks follow suit?

With the Council of Financial Regulators backing the banking watchdog's enforcement of a 3 per cent buffer for home loan applicants, it's unclear who will be next to break out from the pack. Given there was no further interest rate rise announced by the RBA today, the debate may quieten until the interest rate rise many still believe is inevitable is announced.

The bottom line

Reducing refinancing serviceability buffers is seen by many financial experts as a way to reduce mortgage stress and defaulted loans – especially in the current financial climate of rising rates and inflation.

The prudential regulator APRA is not yet calling on all banks to change the serviceability buffer, so borrowers are left to shop around and find a lender that suits their needs as the interest rate situation evolves.

Go deeper: New trend in first-home buyer support has experts concerned

Financial disclaimer

The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.