APRA, the banking watchdog, recommends that Australian banks ‘stress test’ home loan applicants to make sure they can still afford to repay their mortgage if home loan interest rates were to rise.

This is known as a serviceability buffer and is applied to all new applicants (even those who are refinancing).

In October 2021, this serviceability buffer was increased from 2.50 to 3.00 percentage points to counter APRA’s concerns about a rise in ‘risky’ lending.

This means, for instance, that if you were applying for a home loan with a variable rate of 6.55%, the lender would check your ability to make repayments against a rate of at least 9.55%.

But while the serviceability buffer is designed to make sure new borrowers aren’t getting into excessive debt (when compared to their incomes), it’s also, inadvertently, trapping some borrowers on uncompetitive deals.

That’s because hundreds of thousands of Australians fixed their home loans before October 2021 when interest rates were at record lows. Many of these borrowers are now facing a huge jump in their repayments as they come to the end of their fixed-rate period and are rolled onto their lender’s standard variable rate (SVR).

Bear in mind that the SVR is unlikely to be that competitive. But, unfortunately, some of these borrowers can’t switch lenders for a better deal as they no longer pass the serviceability assessment (due to higher interest rates).  

What are lenders doing?

Fortunately, some lenders – including major banks Westpac, NAB and CBA – recognise this situation is far from ideal.

As such, they’ve announced they will reassess some applicants on a case-by-case basis using a lower buffer if the borrower does not pass the lender’s standard serviceability test.

While each lender has their own requirements for clients applying under this reduced stress test, generally speaking, borrowers will need to have a good track record of paying their loan on time,  at least 80% loan-to-value ratios and a good credit score.

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