Mortgage serviceability buffer changes.

You may have heard recently some talk in the media about changes to the banks mortgage serviceability buffer. Let’s take a look at that for a moment. Now, don’t confuse this with lenders mortgage insurance - they are entirely different things.

The mortgage serviceability buffer is an interest rate that the banks apply to calculate a borrower’s affordability and serviceability on a new home loan. Currently the mortgage serviceability buffer interest rate is 2.50%, but this is now being increased to 3% as at the end of October 2021. This increase is in line with the Australian Prudential Regulation Authority’s (APRA) expectations.

You may be wondering why this is happening? The Australian mortgage market continues to experience significant housing growth in a low interest rate environment. APRA has noted that “housing credit growth is increasingly being driven by lending to more marginal and highly indebted borrowers’.

By increasing the buffer rate to at least 3%, APRA aims to ensure mortgage lending is conducted on a responsible and prudent basis.

Basically what this means is that lenders have increased the interest rate in which they calculate loan serviceability for a new home loan application. This does not necessarily mean your existing home loan interest rate will rise, this is only applicable to new home loan applications and does not reflect the actual home loan interest rate.

This can be a complex issue, so it’s best to reach out to the professionals to get advice if you need so.