Some experts are pondering whether it might be time for the Australian Prudential Regulation Authority (APRA) to lower the serviceability buffer.

AMP chief economist Shane Oliver said the successive rate hikes by the Reserve Bank of Australia since May last year have already raised rates by more than the serviceability buffer revised by APRA in 2021.

“Many mortgage holders are now paying rates above those that their bank assessed them on — in this scenario home prices risk falling by around 30% from their high,” he said.

In 2021, APRA raised the minimum serviceability rate buffer from 2.5 to 3.0 percentage points. The buffer is used by banks to assess the borrowing capacity of home loan applicants.

A major factor leading to APRA’s decision was the high household debt.

PropTrack senior economist Paul Ryan said for many lenders, the buffer is “too restrictive” for buyers, with many calling for it to be reduced.

“It is constraining many buyers and making it difficult for first-home buyers in particular,” he said.

“The 3% mortgage serviceability buffer means owner-occupiers currently applying for loans with interest rates above 5% must show they can make repayments if interest rates rise to over 8 while investors must be able to meet repayments above 9%.”

APRA chairperson John Lonsdale said in a recent statement that the revised serviceability buffer remains appropriate given current market conditions.

“APRA closely monitors financial risks, and we see a high degree of uncertainty in the broader outlook, globally and domestically,” he said.

Mr Lonsdale, however, said there are signs of a deterioration in conditions, including falling asset prices and the potential for “pockets of stress”.

“On the other hand, lending standards are broadly sound, loan arrears remain low, and the banking system is well capitalised,” he said.

“APRA’s view is that the 3 percent level remains prudent given the potential for further interest rate rises, high inflation, and risks in the labour market.”

Still, Mr Lonsdale reassured that the current settings are not set in stone.

“We continue to closely monitor the outlook for credit growth, asset prices, lending conditions and financial resilience. Should risks to financial stability change, APRA will adjust its macroprudential policy settings accordingly,” he said.


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