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Mortgage brokers have said they would welcome moves to adjust the regulated serviceability buffer rate of 3% to ensure worthy finance clients are not unnecessarily prevented from borrowing.
The Senate Economics References Committee is currently considering the serviceability buffer rate, as part of a broader review into Australia’s financial regulatory framework and homeownership.
With the committee due to report in early December, brokers told Australian Broker a more nuanced approach to the serviceability buffer should be considered in current market conditions.
“While the buffer has played a critical role in ensuring responsible lending and protecting borrowers against rate increases, the current economic environment has shifted,” said Rhianna Farnan (pictured above centre), chief operating officer and director at Derwent Finance.
“With interest rates stabilising at higher levels and borrowers already adapting to this ‘new normal’, the 3% buffer may now unnecessarily restrict access to credit for financially responsible borrowers.”
Farnan said that, should the buffer be adjusted slightly, it could strike a better balance between safeguarding borrowers and providing them with the opportunity to secure finance, particularly among those borrowers who have demonstrated consistent financial discipline and stability.
Leading Financial Solutions director and principal advisor George Li (pictured above left) said Australia had reached its inflation target range and “we are most likely to see some form of rate cuts in 2025”.
“A reduction to the buffer of 3% would be a prudent and more accurate judgement of client borrowing capacities,” Li said.
Home Loan Village director Aaron Bell (pictured above right) said he would welcome changes to the buffer “at some point” over the next one to two years, depending on the outlook that existed in the market.
“It made sense the buffer was lower during the 2010s when we had a slowly reducing cash rate over a long time, and it also made sense during COVID that we would see an increase early on to put some level of brakes on the system,” Bell said.
“I think where we are right now is a time of relative uncertainty, and so it’s hard to say whether we should reduce right now or wait a little; I would probably be stuck right on the fence as to whether it should be right now or in 12 to 18 months’ time,” he said.
Existing borrowers would benefit from easing the current 3% buffer rate, according to Li, because “many are finding it tough to refinance”.
“These borrowers are able to meet monthly repayments on the current debt but could not qualify for other lenders with the same level of debt due to the high buffer – known as ‘mortgage prison’,” he said.
An MFAA survey of 372 mortgage broker members found that 68% identified serviceability as the main reason clients were unable to refinance in the six months to August 2024.
“By reducing the buffer it allows these borrowers the flexibility to move their debt and find a better deal elsewhere,” Li said.
Farnan said the move would support first home buyers and single-income households as well as refinancers.
“First-home buyers often struggle with borrowing capacity due to rising property prices and the higher cost of living. A reduced buffer could give them the extra edge they need to secure their first property,” she said.
“Single-income households are particularly affected by stricter serviceability measures, as their capacity is already stretched.”
Farnan said these groups, including refinancers, often face the biggest hurdles “not because of their financial behaviours but due to systemic barriers created by serviceability buffers”.
“A 3% buffer on a 6% interest rate is crazy in my opinion, and wiping a lot of potential buyers out of the market,” she said.
Bell said a change to the buffer rate could help those who already have a strong ability to service the most, such as investors.
“It will likely increase borrowing power for investors more than first-home buyers due to the fact that if you can already borrow more then you will be able to borrow a percentage more again,” Bell said.
Bell said two staged reductions of 0.25% to a final buffer rate of 2.5% would be most appropriate, as any further downward reduction would be unnecessary and not backed by mainstream lenders.
Li said Leading Financial Solutions would welcome a “more flexible buffer” rate, rather than a fixed rate of 3% for example, which could depend more on the economic environment.
Farnan said Australia should balance caution with proactivity in revising the serviceability buffer.
“Reducing the buffer from 3% to around 2% to 2.5% could strike the right balance,” Farnan said. “This adjustment would still provide a safeguard against rate increases while recognising that interest rates are already elevated, making a 3% buffer excessive for most borrowers.”
Farnan added that a tiered or case-by-case approach could be beneficial to apply to the serviceability buffer, depending on the risk associated with the loan applicants.
“For lower-risk borrowers with steady incomes, strong credit histories, and conservative debt-to-income ratios, a reduced buffer could be applied,” Farnan said.
Meanwhile those with unstable incomes or higher debt levels, which would be considered higher risk by lenders, could have a buffer rate that remained closer to 3%.
“This nuanced approach would maintain responsible lending practices while ensuring that worthy borrowers are not unfairly excluded from accessing finance,” Farnan said.
What do you think the mortgage serviceability buffer should be lowered to? Share your comments below.
