The Australian Prudential Regulation Authority’s (APRA) decision to leave the mortgage serviceability buffer unchanged has drawn mixed reactions from across the finance and property sectors.
By maintaining the buffer at 3 per cent, APRA has concluded that the current level of borrower protection has not restricted the flow of new credit to Australian households.
Many borrowers continue to struggle with the requirement to service a loan at a rate 3 per cent higher than their actual lending rate. However, APRA stated that its decision took into account elevated household debt levels and above-average total credit growth.
This credit growth is expected to increase further as interest rates begin to fall.
Inflation Data and Rate Cut Expectations
An interest rate cut is expected on 12 August when the Reserve Bank of Australia (RBA) next meets. Official figures released on Wednesday, 30 July, showed inflation had dropped to its lowest level since March 2021.
The Consumer Price Index (CPI) now sits at 2.1 per cent, while the trimmed mean inflation measure is at 2.7 per cent, placing inflation at the lower end of the RBA’s preferred target range.
APRA’s Economic Rationale
Ahead of the inflation data release, APRA Chair John Lonsdale outlined the economic factors that supported keeping the buffer unchanged, despite expectations of further rate cuts through 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,” Mr Lonsdale 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.
Industry Reaction to the Decision
The decision prompted divided opinions across the industry. Some argued that even a modest reduction of the buffer to 2.5 per cent could allow an additional 250,000 borrowers to access home loans.
Others warned that lowering the buffer could expose overstretched borrowers and the broader banking system to greater risk if an economic shock were to occur.
Carolyn Xaftellis, Senior Mortgage Specialist at Specialist Mortgage, outlined several reasons the serviceability buffer should remain at 3 per cent.
“Borrowers will be able to cope with rate rises without falling into hardship, and it promotes responsible lending, while reducing the risk of overborrowing.”
“This can 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’s 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 rates.”
“For banks to lower their buffer they are increasing risk, so they would have to mitigate this in some capacity,” Ms Xaftellis said.
Dissenting Views on the Mortgage Buffer
Not all stakeholders supported APRA’s decision. Before the election, the Coalition stated it would reduce the buffer to 2.5 per cent.
The buffer has remained at 3 per cent since it was increased from 2.5 per cent in October 2021 during the pandemic.
The Finance Brokers Association of Australasia (FBAA) believes the lockdown-era level of protection is now excessive.
FBAA Managing Director Peter White AM said APRA’s claim that the buffer has not restricted new credit does not align with the association’s research.
Borrowing Capacity Research
That research found that reducing the buffer by 0.5 per cent could increase 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.”
Research commissioned by the FBAA and conducted by CoreData found that lowering the buffer by 0.5 per cent could allow around 270,000 more people to access median home loans.
Nearly 400,000 first home buyers aged between 25 and 34 would benefit, particularly those using a 5 per cent deposit 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 added that the 3 per cent buffer was forcing thousands of Australians into what he described as “mortgage prison,” preventing refinancing to lower rates despite proven repayment ability.
Political Commentary
Labor MP Jerome Laxale, Member for Bennelong, said renters transitioning into homeownership should be given greater flexibility.
“It’s not just first home buyers, it’s renters trying to transition to homeownership who may have previously owned a home before getting divorced or splitting with their partner.”
Coalition Senator Andrew Bragg said APRA had regulated mortgages for too long without enough focus on first-home buyers.
“Revising the buffer and risk weights for first homeowners would be a practical, equitable and sustainable way to tilt the scales.”
Banking Regulation Changes
While keeping the buffer unchanged, APRA announced changes to banking regulations aimed at reducing compliance costs and streamlining oversight.
The reforms introduce a three-tier regulatory system that replaces the previous one-size-fits-all approach, matching requirements to each bank’s size and risk profile.
Speaking at the Australian Banking Association’s 2025 Conference, Mr Lonsdale said the reforms would allow APRA to apply greater nuance to supervision and policy settings.
“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.
Borrowers and investors have welcomed the reforms, hoping lower compliance costs will increase competition, particularly from mid-tier and international banks. With more capital available, these banks may innovate and compete more aggressively with Australia’s major lenders.
APRA will also revise its bank licensing framework to improve 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.
Australian Banking Association Response
The Australian Banking Association also welcomed the changes. ABA CEO Anna Bligh said customers would 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.”
Article Q&A
What is the mortgage serviceability buffer?
APRA applies a buffer above a bank’s lending rate that borrowers must meet to demonstrate they can manage unexpected interest rate rises. Borrowers must currently show they can service a loan at a rate 3 per cent higher than the lending rate.
What is the current mortgage buffer rate?
The buffer has remained at 3.0 per cent since it was increased from 2.5 per cent in October 2021.
What banking reforms has APRA introduced?
In late July 2025, APRA announced a revamp of banking regulations aimed at reducing compliance costs. The reforms introduce a three-tier model that aligns regulatory requirements with bank size and risk, allowing for greater flexibility and differentiation.