Why banks assess your home loan repayment capacity at higher interest rates?
When you apply for a mortgage, the lender uses a series of criteria to assess how likely you’d be to repay the loan. As part of this process, the lender also considers whether you’d be able to continue making your repayments if interest rates were to rise.
Generally, lenders will apply a buffer of at least 3.00 percentage points – so if you applied for a loan with an interest rate of 6.50%, this would mean calculating whether you’d be able to make repayments at 9.50%.
This ‘mortgage serviceability buffer’, as it’s known, is mandated by APRA, Australia’s banking regulator.
Partly, it’s designed to prevent lenders from issuing risky loans; because if a large number of borrowers defaulted on their loans, that would undermine the banking system. And, partly, it’s designed to protect borrowers from taking on loans they might not be able to afford.
The serviceability buffer can make it harder for borrowers to qualify for loans, but is ultimately designed to be in their best interests.
