At first glance, the Federal Opposition’s election pledge to direct the Australian Prudential Regulation Authority (APRA) to lower the home loan serviceability buffer from 3% to 2.5% might seem like delivering two interest rate cuts in one policy move[i].

What is the serviceability buffer?

When applying for a home loan, lenders assess your income, expenses, debts, and loan size. Crucially, they also examine if you could continue to meet repayments if interest rates rise. This is where the serviceability buffer is employed. Currently set at 3%, the buffer requires lenders to assess whether you can still afford the loan if rates increase by that margin. For example, on a 5.75% interest rate loan, your ability to repay is tested at 8.75%.

While the RBA kept its powder dry on rate cuts this month, Craig Betalli, Senior Broker at Our Broker, notes that a 0.5% reduction in interest rates via a lower serviceability buffer on a $1 million loan could save borrowers around $5,000 annually and increase borrowing capacity by approximately $50,000. However, he cautions that while this might look appealing to some voters, it does little to improve housing supply the issue at the heart of the affordability challenges in some of our big cities. Instead, demand side initiatives such as reducing the serviceability buffer often results in buyers taking on more debt and facing higher monthly repayments.

Craig is also critical of policies such as the Government’s Help to Buy scheme, including the recent increases announced in the Budget to income thresholds—from $90,000 to $100,000 for individuals and $120,000 to $160,000 for couples and single parents[ii]. While these measures may help more people enter the market, he argues they are inflationary and simply fuel further price growth without addressing the underlying issues of affordability and limited housing supply.

He warns that rapid urban development to address affordability in our major capital cities can, and has, led to substandard construction due to cost pressures and high demand. As a more sustainable solution, therefore, Craig believes a policy solution needs to include initiatives that promote population growth and housing development in regional areas. This makes sense as in regional areas, properties are generally more affordable than the capital cities.

However, Craig stresses that this approach must be supported by meaningful investment in infrastructure and job creation to effectively ease pressure on clogged capital city property markets.

The Opposition also announced plans to task APRA with adjusting the capital treatment of loans backed by Lenders Mortgage Insurance (LMI). However, details on how this policy will be implemented remain unclear at this stage.

If you’re unhappy with the current interest rate on your home loan, speak with Our Broker today at 1800 913 677 to explore your choices.

[i] https://www.michaelsukkar.com.au/ministerial-media-releases/coalition-apra-reforms-to-get-australians-into-homes/

[ii] https://ministers.treasury.gov.au/ministers/clare-oneil-2024/media-releases/albanese-labor-government-building-more-homes-more