How a 2.5% buffer could affect borrowers – case studies

As policymakers and regulators consider adjustments to the serviceability buffer used in home loan assessments, it is important to illustrate how such changes could affect first home buyers seeking to enter the housing market.

The scenarios below feature typical borrowers — a dual-income couple in Sydney and a single professional in Perth — each with stable incomes, no liabilities, and consistent expenditure patterns aligned with the Household Expenditure Measure (HEM). They demonstrate that even modest adjustments to the buffer can influence borrowing power, with potential downstream impacts on access to suitable housing.

Case Study: Jordan and Taylor

Jordan and Taylor are a couple in their late 20s living in Sydney. Both earn an income of $90,000 per year, putting their combined household income at $180,000. They don’t have any existing debts and their lifestyle is modest — their living expenses sit neatly in line with the Household Expenditure Measure (HEM).^[1] They are pretty run-of-the-mill first home buyers — dual income, no liabilities, and consistent spending habits.

They’re looking to purchase their first home with a 30-year principal and interest home loan. The interest rate they expect to pay is around 6% — which, in the current market, is fairly typical. But what they can actually borrow depends not just on their income and expenses, but on the interest rate buffer that lenders apply on top of the mortgage interest rate when assessing their ability to repay.

Lenders are required to assess whether borrowers like Jordan and Taylor could still meet their repayments if interest rates were 3 percentage points higher than the actual rate — that is, at 9%. Based on that, Jordan and Taylor can borrow just under $970,000.

But if the buffer were reduced to 2.5 percentage points — still well above the actual rate they’d be paying — their borrowing capacity increases to just over $1 million. That’s a $45,000 difference, purely due to a change in the buffer, not in their income or lifestyle. In a tight housing market like Sydney’s, that additional $45,000 could be the difference between securing a home in a preferred school catchment, avoiding a longer commute, or having to walk away from purchasing a property at this point in time altogether.

Case study: Max

Max is a 38-year-old professional renting an apartment in Perth. He earns a solid income of $165,000 per year and has no liabilities. Financially steady and ready to purchase his first home, Max is exploring his borrowing options with a 30-year principal and interest home loan at an actual interest rate of 6%.

When it comes to borrowing, Max’s capacity doesn’t just hinge on income and expenses — it’s also shaped by the interest rate buffer applied during the loan assessment process. This buffer is a safeguard used by lenders to test whether a borrower could still meet their repayments if interest rates rose significantly.

If the lender applies a 3% buffer, Max can borrow up to $747,100. But if the buffer is reduced to 2.5%, his borrowing capacity rises to $781,800 — an increase of $34,700.

In a market like Perth, where property prices are slightly more affordable than the east coast capitals, this additional borrowing power could make a difference for Max.  For Max, it might open the door to:

• Securing a home closer to work or family,
• Upgrading from a unit to a townhouse,
• Or retaining more of his savings for post-settlement costs or renovations.

[1] The HEM is a standard benchmark that some banks use to estimate people’s annual living expenses when considering home loan applications.