What Is a Home Loan Servicing Buffer – and Why Does It Matter?
When you apply for a home loan, the interest rate you’ll actually pay isn’t necessarily the interest rate the lender uses to work out how much you can afford to borrow.
Lenders also apply what’s known as a servicing buffer.
Put simply, a servicing buffer means the lender assesses your ability to make repayments at an interest rate higher than the rate you’ll actually be paying.
How does a servicing buffer work?
For banks and other Authorised Deposit-taking Institutions (ADIs), the Australian Prudential Regulation Authority (APRA) currently requires a servicing buffer of 3 percentage points above the loan's interest rate.
This 3% buffer is the norm across Australia's mainstream bank lenders.
For example, if you were applying for a home loan with an actual interest rate of 5.50%, a lender applying the standard 3% servicing buffer would assess your ability to afford the loan at an interest rate of at least 8.50%.
You aren't actually paying 8.50%. It's essentially a stress test designed to make sure you could continue to afford the loan if interest rates were to rise.
Why does the servicing buffer affect borrowing capacity?
The higher the assessment rate, the harder it can be to demonstrate that you can comfortably afford the proposed loan.
This means someone may be perfectly comfortable making the repayments at the actual interest rate they're being offered, but when the lender assesses those repayments at an interest rate 3 percentage points higher, their maximum borrowing capacity can be considerably lower.
This is particularly relevant for borrowers who are already close to the maximum amount they need to borrow.
Can some lenders use a lower servicing buffer?
Yes — and this is where the distinction between ADI and non-ADI lenders becomes important.
ADI stands for Authorised Deposit-taking Institution. In simple terms, these are institutions such as banks, credit unions and building societies that are authorised to accept deposits from customers and typically provide everyday banking products such as transaction and savings accounts.
Not every home loan lender is an ADI. Some non-bank lenders operate differently and aren't subject to the same APRA requirement that requires ADIs to apply the minimum 3% servicing buffer.
So what's different about a 2% servicing buffer?
Some non-bank lenders have the flexibility to assess eligible borrowers using a lower servicing buffer.
I recently attended the launch of Connective Athena, a new white-labelled lending option available to me through my aggregator, Connective.
Of all the features discussed on the day, one in particular really caught my attention — for eligible borrowers, Connective Athena can use a 2% servicing buffer rather than the more common 3%.
Using our earlier example, if the actual home loan interest rate was 5.50%, the difference would look like this:
Standard 3% buffer - assessed at 8.50%
2% buffer - assessed at 7.50%
That one percentage point difference in the assessment rate can potentially make a meaningful difference to borrowing capacity.
Is a 2% servicing buffer new?
No. Some non-bank lenders have offered lower servicing buffers for eligible borrowers for some time.
What caught my attention with Connective Athena is the combination of a 2% servicing buffer and interest rates that are competitive with mainstream bank lenders.
Traditionally, some borrowers who needed the additional servicing flexibility offered by specialist or non-bank lenders could find themselves paying a significantly higher interest rate for that flexibility.
This potentially provides another option for borrowers who may fall just short of their required borrowing capacity under a traditional lender's 3% assessment.
Does a 2% servicing buffer mean you can automatically borrow more?
Not necessarily.
A servicing buffer is only one part of a lender's overall assessment of your borrowing capacity.
Your borrowing capacity can also be affected by your income, existing home loans and other debts, credit card limits, living expenses, dependants, loan term, rental income and a range of other lender-specific policies.
That's why comparing home loans based purely on the advertised interest rate doesn't always tell the full story.
Two lenders offering similar interest rates can arrive at very different borrowing capacities for exactly the same borrower because of differences in their credit and servicing policies.
For some borrowers, the standard 3% buffer won't present a problem at all. For others — particularly those sitting close to their required borrowing capacity — having access to a lender that can assess an application using a 2% buffer could make a meaningful difference.
Want to know what your borrowing capacity looks like?
If you're looking to buy, refinance or invest, I can compare your circumstances across a broad range of lenders and explain how their different policies may affect your borrowing capacity.
My Mortgage Matters is based on the Gold Coast and assists clients Australia-wide via phone and video appointments.
SFTKOG Pty Ltd ACN 695 271 400 trading as My Mortgage Matters ABN 11 695 271 400 Credit Representative 558420 is authorised under Australian Credit Licence 389328 Disclaimer: This content provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal; tax or financial advice and you should always seek professional advice in relation to your individual circumstances. Subject to lenders credit assessment with terms and conditions, fees and charges and eligibility criteria apply.
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