The Australian Prudential Regulation Authority (APRA) has delivered a decisive message to the mortgage market, announcing it will maintain the current 3% mortgage serviceability buffer despite mounting political pressure and industry calls for easing.
This decision, announced in July 2025, has significant implications for anyone looking to secure a home loan, particularly first home buyers who had hoped for relaxed lending criteria to improve their market access.
Understanding the 3% Serviceability Buffer
The mortgage serviceability buffer is one of APRA’s most important lending safeguards, requiring banks and lenders to assess whether borrowers can afford mortgage repayments at a rate significantly above current interest rates.
Currently set at 3%, this means lenders must verify that borrowers can service their loan at the current interest rate plus an additional 3 percentage points. For example, if you’re applying for a variable rate loan at 5.5%, the lender must assess your ability to make repayments at 8.5%.
This acts as a crucial safety net, ensuring borrowers aren’t overextended if interest rates rise during their loan term.
The Evolution of APRA’s Buffer Policy
- 2014: Initial 2% buffer introduced
- 2019: Increased to 2.5% as property markets heated up
- 2021: Raised to 3% during the COVID property boom
The 2021 increase proved timely. As the RBA raised rates 13 times between May 2022 and November 2023, many borrowers who had secured loans at 2–3% suddenly faced repayments at 6–7%, creating significant stress for highly leveraged households.
Political and Industry Pressure for Change
The decision came despite strong pressure:
- Political pressure: The Coalition indicated before the last election it would direct APRA to ease the buffer if elected. Spokesmen Michael Sukkar and Andrew Bragg argued that strict rules were locking up to 40% of first home buyers out of the market.
- Industry calls: NAB and the Australian Bankers Association pushed for easier rules for first home buyers, saying the current approach was too restrictive.
- Economic commentary: Some economists suggested moderating inflation and rate cuts meant the buffer could safely be reduced.
APRA’s Rationale: Why the Buffer Stays
APRA Chair John Lonsdale outlined several reasons for keeping the settings unchanged:
- High household debt levels: Australia has one of the highest debt-to-income ratios globally, creating systemic risk.
- Above-average credit growth: With credit already growing and likely to increase as rates fall, loosening standards could fuel excessive risk-taking.
- Historical patterns: Falling interest rates combined with strong labour markets often lead to speculative lending, higher house prices, and riskier borrowing.
- Forward-looking approach: APRA stressed the importance of preparing for future risks, not just responding to present conditions.
Shaper Finance’s Analysis: The Right Decision for Market Stability
At Shaper Finance, we believe APRA has made the correct call.
- Preventing speculation: Looser rules and lower rates could have fuelled risky borrowing and unsustainable price growth.
- Protecting borrowers: The buffer shields households from overcommitting if conditions change.
- Supporting stability: Strong lending standards help prevent damaging boom–bust cycles.
- Preserving affordability: While restrictive short term, the buffer helps curb the kind of price surges that make housing permanently unaffordable.
Impact on Different Borrower Types
- First home buyers: Disappointing for some, but it protects them from excessive debt. Schemes like the expanded Home Guarantee Scheme provide more targeted support.
- Existing homeowners: Benefit from stability and less chance of speculative price spikes.
- Property investors: Prevents speculative activity that distorts the market.
- High-income borrowers: Least affected, as they typically pass the buffer test easily.
What This Means for Your Home Loan Strategy
- Focus on genuine serviceability
- Reduce existing debts
- Build savings history
- Maintain stable employment
- Show surplus income through expense management
- Consider the full rate cycle
Plan for the possibility of higher repayments, not just today’s lower rates. - Explore alternative strategies
- Build a larger deposit
- Use guarantor options
- Access first home buyer schemes
- Look at more affordable property types or locations
- Seek professional guidance
Mortgage brokers understand how different lenders apply the buffer and can optimise your application.
Future Implications and Market Outlook
- Sustainable growth: Price rises more likely to reflect real demand and supply, not speculation.
- Continued innovation: Lenders will create products that help borrowers meet serviceability while staying within prudential rules.
- Policy focus shift: Expect more emphasis on housing supply and targeted buyer support rather than easier credit.
Preparing for Success Under Current Rules
- Build strong financial foundations: Improve your real position rather than hoping for relaxed lending.
- Understand lender variations: Each bank assesses income and expenses differently.
- Time your application carefully: Conditions, lender appetite, and personal circumstances matter.
- Consider professional support: Expert help is even more valuable when lending rules are strict.
The Broader Economic Context
By keeping the 3% buffer, APRA is protecting against future instability. History shows that when rates fall while employment stays strong, speculative lending and price surges follow.
This approach prioritises long-term stability over short-term access, ensuring borrowers can manage loans through all stages of the cycle.
Looking Forward
While the decision may disappoint some, it reinforces the need to build financial strength and work within prudent lending frameworks.
For serious buyers, success will come from:
- Strategic planning
- Professional guidance
- Strong financial foundations
At Shaper Finance, we’re committed to helping clients navigate these requirements successfully and achieve homeownership goals while protecting long-term financial security.