One of the most common questions borrowers ask their broker is: "Why does the bank say I can't borrow as much as I expected?" In most cases, the answer comes down to one policy — APRA's 3% serviceability buffer. Understanding it is fundamental for any broker, business owner, or property investor navigating the Australian lending market.
The Australian Prudential Regulation Authority (APRA) requires all APRA-regulated lenders — the major banks, most second-tier banks, and credit unions — to assess mortgage applications at an interest rate at least 3% above the loan's actual interest rate.
This is known as the serviceability buffer or stress test rate. It was introduced to ensure borrowers can still meet their repayments if interest rates rise significantly after they take out the loan.
If a borrower is applying for a home loan at 6.2%, the lender must assess whether they can afford repayments at 9.2% or higher. The lender may also have their own floor rate — a minimum assessment rate regardless of the actual rate — and will use whichever is higher.
A borrower earns $120,000 per year. They want to know their maximum borrowing capacity for a principal and interest home loan over 30 years.
Actual rate: 6.2% — estimated maximum borrowing capacity: approximately $780,000
Assessment rate: 9.2% — actual borrowing capacity assessed by lender: approximately $590,000
The 3% buffer reduces this borrower's assessed capacity by approximately $190,000 — nearly 25% less than what the actual rate would suggest.
APRA increased the buffer from 2.5% to 3% in November 2021 during a period of record-low interest rates, when the RBA cash rate sat at 0.1%. The concern was that borrowers taking out loans at historically low rates could find themselves in financial difficulty if rates normalised.
That concern proved well-founded — the RBA subsequently raised rates from 0.1% to 4.35% between May 2022 and November 2023, a 4.25% increase in just 18 months. Borrowers who had been stress-tested at 3% above their actual rate were far better positioned to absorb this than they would have been under the previous 2.5% buffer.
Non-bank lenders are not regulated by APRA and are therefore not required to apply the 3% buffer. Some non-banks use lower assessment rates, which is why borrowers who do not qualify with a major bank may qualify with a non-bank lender. This is a legitimate strategy for brokers to understand — not a loophole, but a policy difference between lender categories.
The serviceability buffer is only one component of how lenders assess borrowing capacity. The other major component is the Household Expenditure Measure (HEM) — a benchmark figure lenders use to estimate living expenses when the borrower's declared expenses appear lower than what the data suggests is typical for their household size and location.
Lenders use whichever is higher — the borrower's declared expenses or the HEM benchmark. Combined with the 3% buffer on the assessment rate, these two factors frequently reduce a borrower's assessed capacity well below what they expect based on their income alone.
Another factor that reduces borrowing capacity more than most borrowers expect is credit card limits. Most APRA-regulated lenders assess credit card repayments based on the limit, not the outstanding balance — typically 3% of the credit limit per month as an assumed minimum monthly commitment.
A borrower with $30,000 in credit card limits (even if they are paid off monthly) has an assumed monthly commitment of $900 deducted from their serviceability assessment. On a 30-year principal and interest loan at a 9.2% assessment rate, that $900/month reduces borrowing capacity by approximately $115,000.
Closing unused credit cards before a loan application is one of the fastest and most effective ways to increase assessed borrowing capacity — and one of the most valuable pieces of advice a broker can give a client preparing to apply.
Understanding the serviceability buffer is not just about explaining why a client cannot borrow as much as they hoped. It is the foundation of every residential loan assessment and shapes:
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