The APRA serviceability buffer, explained

If you have ever wondered why a bank will not lend you the amount whose actual repayment fits your budget, you have met the serviceability buffer. APRA, the prudential regulator, expects authorised deposit-taking institutions to assess loan serviceability at a rate materially above the customer rate. The buffer is a foghorn: rates rise, households should not be originated at the edge of oxygen.

This is a mechanism explainer. For the rest of the calculator, see how lenders calculate borrowing power.

What the buffer is not

It is not a fee. It is not added to your contractual rate. You do not 'pay APRA'. You pay the rate in the contract. The buffer lives in the spreadsheet that decides whether the contract may exist.

It is not a prediction of future cash rates. It is conservatism. Sometimes the cash rate will not rise by three points. The originations from the last cycle that assumed rates could never rise are why the conservatism exists.

How it is applied

Assessment rate ≈ max(customer rate + buffer, a floor rate some lenders also use). The repayment at that assessment rate, on the proposed term and amortisation type, must fit inside your surplus.

Interest-only loans are often assessed as if they would revert to principal-and-interest, and at the buffered rate, because IO with a tiny test is how people drown at the end of the IO term.

A 40-year term (where even offered) inflates borrowing power by shrinking P&I at the customer rate; the buffer still applies, and some lenders cap terms because they are not fools.

Why your refinance failed

You have been paying a loan for six years. You have never missed. The new lender must assess you as a new origination. Your childcare is $2,400 a month, which did not exist in 2019. The buffer is 3 points on a 6 per cent rate. You fail. The current lender, who already holds you, may still vary a rate without a full new origination in some cases — another reason to ask them to match before you refinance.

Non-banks

APRA's buffer is a requirement for APRA-regulated ADIs. Some non-bank lenders have more flexibility and may use a smaller buffer or different floors. That flexibility is why some households end up at non-banks: not because they are 'bad credit', but because the ADI test is a wall. Non-bank pricing and features can be worse. Compare the whole contract.

Worked sketch

Customer rate 6.10 per cent, 30 years, $650,000 P&I. Actual repayment about $3,940. Buffered at 9.10 per cent, repayment about $5,280. The assessment asks whether $5,280 plus expenses plus other debts fits income. If you only looked at $3,940, you were looking at the wrong test.

Policy moves

APRA has changed the buffer before and will change it again if the cycle demands. A cut in the buffer increases system borrowing power; a rise does the opposite. Neither is a personal compliment. When it changes, this desk will update the number; the logic stays.

What you can do

You cannot waive APRA. You can lower commitments, raise documented income, choose a smaller loan, or use a lender whose other policy (overtime, HEM, card factors) is less harsh so the buffered repayment still fits. You can also buy less house, which remains legal.

The buffer is why Australian mortgages are supposed to survive a bad couple of years. It is annoying at application time. It is the point.

Floors as well as buffers

Some lenders also use a floor assessment rate (for example, they will not assess below 7 per cent even if customer rate plus buffer is lower). In a high-rate world the buffer binds; in a low-rate world the floor binds. Ask which is doing the work on your quote.

IO and construction

Interest-only investment loans and construction IO periods are where buffers and notional P&I tests stack. If you fail, it may not be because APRA hates you; it may be because you asked to be tested on a structure that never builds principal.

Talking about the buffer with a partner

It is a boring concept until it kills a bid. Explain it as 'they test us as if rates were X, so we do not buy the maximum we can scrape today'. That sentence has saved more households than a sharp variable rate.

Using the buffer as a household rule

Some couples voluntarily budget at customer rate plus one per cent even after approval, putting the rest to extra repayments or offset. That is not APRA. That is self-imposed conservatism. It makes a later rate rise less of a personality crisis. If that extra amount would make the purchase impossible, the purchase may be too tight even if the bank said yes.

When non-banks help, and when they don't

A smaller buffer can approve a loan an ADI will not. The rate, the fee, and the exit (how you refinance to a bank later) decide whether that is a bridge. If the non-bank price is a full percentage point higher and the exit is 'maybe in two years', you may be paying a lot to buy now. Sometimes buying now is still right. Price it as a two-year product, not as forever.

Documents to bring, and a last caution

When you sit down with a lender, broker, packager or yard manager, bring the quoted customer rate, the lender's assessment rate in writing, and your surplus at that assessment rate. If they will not look at paper, they are selling speed. Speed is expensive in Australian credit.

Write down the thing you are afraid to ask — the fee, the balloon, the HELP treatment, the break cost — and ask it first, while you still have the nerve. The second conversation is always weaker. If the answer is vague, you do not have an answer.

This desk would rather you delay a week than sign a contract whose comparison rate you cannot explain to a friend. ASIC's MoneySmart remains the public-interest spare brain: use it the night before, not the morning after. And if the product only works on overtime that is not in your contract, it does not work. Buy a smaller thing, or wait. Waiting is still allowed.