No reprieve for new borrowers, as APRA keeps mortgage buffer rate unchanged

The decision by Australia’s regulator of the Australian financial services industry to keep the mortgage serviceability buffer unchanged has elicited a mixed reception.

In keeping the current 3 per cent mortgage serviceability buffer, the Australian Prudential Regulation Authority (APRA) has concluded that this level of borrower protection has not been restrictive on new credit to the household sector.

While borrowers struggle to meet the strict criteria of being able to service a loan 3 per cent higher than the lending rate, APRAS’s announcement noted that they took account of high levels of household debt and above-average total credit growth, which is expected to rise further as interest rates decline.

That interest rate cut should come on 12 August, when the Reserve Bank of Australia (RBA) next meets. Official figures released Wednesday (30 July) showed that inflation had fallen to its lowest level since March 2021 and to the bottom end of the RBA’s preferred range. The CPI is now at 2.1 per cent (while the trimmed mean figure is at 2.7 per cent).

Ahead of the inflation news, APRA Chair John Lonsdale outlined what the regulator saw as the economic realities that justified the mortgage buffer decision, despite interest rates being expected to fall further in 2025.

“Lower inflation and interest rates have eased financial pressures on borrowers, labour market conditions remain tight, bank lending standards remain sound and non-performing loans remain low, however, the risk of economic shocks from the uncertain geopolitical environment is elevated,” he said.

“Over recent months, we have seen credit continuing to flow to different borrower segments, including to first-home buyers.

“Declines in inflation and interest rates have eased financial pressures on borrowers and increased borrowing capacity for new borrowers, and lending standards remain sound.

“Looking ahead, however, should interest rates fall significantly further while labour markets remain robust, that has historically led to higher credit growth and leverage, higher house prices and often more risky lending, such as high debt-to-income and investor lending.

“The potential for a recurrence of these trends is something both APRA and the Council of Financial Regulators are carefully monitoring.

“High household debt is a key vulnerability in our financial system, which has more exposure to residential mortgages than any comparable country,” Mr Lonsdale said.

The decision drew a mixed reception, with some arguing that even a small reduction to a 2.5 per cent buffer would unlock homes for 250,000 more borrowers, while others have pointed to the risks to overstretched borrowers and the banking system if there was an economic shock.

Carolyn Xaftellis, Senior Mortgage Specialist at Specialist Mortgage, outlined a range of reasons the serviceability buffer should stay at 3 per cent.

“Borrowers will be able to cope with rate rises without falling into hardship and it promotes responsible lending, while reducing risk of overborrowing.

“This can be become a problem if house prices rise quickly, and household debt in Australia is already amongst the highest in the world.

“While circumstances now might indicate that the buffer could be reduced, it is a forward-looking safeguard for both banks and borrowers.

“The buffer helps ensure the financial stability of Australia banking system, protecting banks from widespread loan defaults,” Ms Xaftellis said.

She added that it was the people buying at really high prices with high loan-to-value (LVR), over 80 per cent, who were most at risk of default.

“The option to have a lower buffer is available now.

“Non-bank lenders do this, but they offset the risk with higher upfront fees and ongoing interest rate.

“For banks to lower their buffer they are increasing risk, so they would have to mitigate this in some capacity,” Ms Xaftellis said.

Dissenting mortgage buffer opinion

Not everyone was as supportive of the regulator’s decision to keep the buffer on hold.

The Coalition had said pre-election that it would reduce the buffer to 2.5 per cent.

It has been at the current level since it increased it from 2.5 per cent in October 2021, at the height of the pandemic.

The Finance Brokers Association of Australasia (FBAA) is among those who believe that lockdown-era level of protection is overdone.

FBAA managing director Peter White AM said the APRA boss’ comment that “the current level of the buffer rate has not been restrictive on new credit to the household sector” is not consistent with the association’s research that found reducing the serviceability buffer by 0.5 per cent could boost borrowing capacity by $276 billion nationally.

“We welcome APRA's decision to review the serviceability buffer more regularly, which is what we’ve been calling for, but see this decision as a missed opportunity to widen the path to homeownership for more Australians.”

Mr White was referring to research commissioned by the FBAA and conducted by global research consultancy CoreData, which found that a reduction of the buffer rate by 0.5 per cent would mean that around 270,000 more people could access median home loans.

The research also showed that almost 400,000 first home buyers aged between 25 and 34 would benefit, with those using a five per cent deposit seeing the greatest access gains for loans under $900,000.

“This small reduction would unlock loans for borrowers we know can afford to service them,” he said.

“In the light of all this, it's very difficult to accept APRA’s claim that credit continues to flow where it is needed.”

He said the 3 per cent buffer was also “forcing thousands of Australians to remain in ‘mortgage prison’ leaving them unable to refinance loans for a lower rate, despite them having proven their ability to service a loan at a higher rate.”

Both sides of politics have also vented a degree of frustration at the lack of flexibility.

Labor MP Jerome Laxale, the Member for Bennelong, said anyone trying to transition from renting to home ownership should have a bit of flexibility in those buffers.

“It’s not just first home buyers, it’s renters trying to transition to home ownership who may have previously owned a home before getting divorced or splitting with their partner.”

Andrew Bragg, a Senator for NSW and the Coalition’s home ownership spokesman said that, “For too long, APRA has regulated mortgages without a focus on first home buyers.

“Revising the buffer and risk weights for first home owners would be a practical, equitable and sustainable way to tilt the scales.”

Banking regulation changes

While APRA kept the mortgage servicing buffer unchanged, it did announce a revamp of banking regulations, aiming to cut compliance costs and streamline oversight for banks of all sizes.

The reforms introduce a three-tiered regulatory model and ditch the previous one-size-fits-all rules, instead matching requirements to each bank’s size and risk. 

Speaking at the Australian Banking Association’s (ABA) 2025 Conference, Mr Lonsdale said the overhaul would allow the regulator to introduce more nuance into their policy and supervision approach to banks, with greater differentiation between requirements for different bank business models. 

“APRA will soon move towards having three tiers in banking, roughly corresponding to large banks (the majors), medium banks (other banks that are significant financial institutions or SFIs) and small banks (non-SFIs),” he said.

It is hoped, by borrowers and investors at least, that the easing of regulatory burdens could unlock more competition, especially from mid-tier and overseas banks. With lower compliance costs, these players might have more capital to innovate and compete for customers – putting pressure on Australia’s big four. 

APRA will also amend its bank licensing framework to enhance transparency and efficiency.

“The final action APRA committed to is to amend our bank licensing framework, with the aim of making our expectations more transparent and the process more efficient,” Mr Lonsdale said.

The Australian Banking Association (ABA) also welcomed the reforms.

ABA CEO Anna Bligh said it was customers who would ultimately benefit from a strong and competitive banking system.

“Today’s announcements from APRA will support Australia’s mid-tier and international banks to offer more competitive services for customers,” Ms Bligh said.

“These commitments will not reduce consumer protections, they are about making sure our smaller banks can focus on delivering better products and services to their customers.

“Having strong small and medium-sized banks in Australia is important for competition and customer choice.”