Serviceability buffer gap widens between banks and non-banks
The gap in serviceability buffer requirements between Australia’s banks and non-bank lenders has become more significant, affecting both credit risk and competition in the mortgage market, according to Fitch Ratings.
Lenders apply different interest rate buffers when assessing new home loan applications. Banks regulated by the Australian Prudential Regulation Authority (APRA) must use a 3% buffer above the loan rate. Most non-bank lenders, however, apply a 2% buffer. For like-for-like refinancing, some non-banks use a buffer as low as 1%, and in certain cases, no buffer at all if the borrower’s financial situation improves. These differences in underwriting standards can have a material effect on the credit quality of lenders’ portfolios.
Serviceability buffers were first introduced by APRA in 2014, when mortgage rates had dropped to 5%. The buffers serve as a stress test to ensure borrowers can continue repayments if interest rates rise. Over time, APRA has adjusted its approach in response to changing economic conditions. The buffer remains a key consideration for regulators, lenders, and investors.
Initially, lenders were required to assess serviceability at the higher of the actual rate plus a 2% buffer or a minimum floor of 7%. This reflected concerns about household debt and systemic risk in a low-rate environment. In July 2019, APRA removed the fixed floor, allowing lenders to set their own floor rates – usually between 5% and 6% – and raised the buffer to 2.5%. The buffer was increased again to 3% in October 2021, in response to rising household debt and the prospect of higher rates.
APRA reaffirmed the 3% buffer in July 2025, maintaining the focus on borrower resilience. While this applies to banks, non-bank lenders have taken a more flexible approach since 2021, with most reducing their buffer to 2% and some lowering it further for like-for-like refinancing. This has led to a two-tiered market, the global credit rating agency said, with non-banks attracting borrowers who do not meet banks’ stricter criteria. As a result, origination volumes and risk profiles have shifted, particularly for borrowers unable to meet a 3% buffer.
According to Fitch, the impact of these policies became clear after Australia’s cash rate rose by a cumulative 4.25% in 2022 and 2023. This resulted in a group of borrowers, often called ‘mortgage prisoners’, who are unable to refinance to lower-rate loans because they cannot meet higher serviceability tests.
To address this, the National Consumer Credit Council introduced a targeted concession in 2019 for like-for-like refinancing. This allows eligible borrowers to refinance at a lower rate if their repayments decrease and certain conditions are met. The concession typically uses a 1% buffer, though it can be lower in some cases.
“We adjust foreclosure frequency to reflect the increased credit risk when assessing mortgage portfolios containing like-for-like refinanced loans using lower buffer rates,” said Chris Stankovski (pictured right), senior director at Fitch Ratings. “This includes a 10% adjustment to loans that do not meet a 2% serviceability buffer, but pass with a 1% buffer, and a 20% adjustment for mortgages that cannot pass a 1% buffer.”
Stankovski added that the ongoing divergence in serviceability buffers highlights the challenge of balancing regulatory oversight, lender risk appetite, and borrower outcomes.
“Higher buffers strengthen financial system resilience, but can restrict refinancing options, particularly in a rising rate environment,” he said. “Conversely, more flexible buffers improve access to credit, but increase credit risk, especially for marginal borrowers.”
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