What is the serviceability buffer?
The serviceability buffer is like a built-in safety net for home loans, designed to protect both the borrower and the lender.
As the name implies, the serviceability buffer provides a contingency – or buffer – to give borrowers a fair chance of continuing to meet their home loan repayments if financial circumstances change, such as if interest rates were to rise.
The buffer is a set figure expressed as a percentage – currently 3% (as at December 2024) – that a lender must apply on top of a loan’s interest rate when it’s determining whether a borrower will be able to meet their repayments on the home loan they’ve applied for.
In simple terms, if a borrower is applying for a home loan with an interest rate of 6% p.a., the lender must assess the borrower as if they were to pay an interest rate of 9% p.a.
Who sets the serviceability buffer?
Australia’s serviceability buffer is set by the national banking regulator, the Australian Prudential Regulation Authority (APRA). It was introduced in December 2014 when Australian property prices were rapidly escalating and households held high levels of debt.
At the time, APRA introduced a minimum serviceability buffer of 2% on new loans in a bid to reduce medium-term risks to Australia’s financial stability. The regulator was concerned rising interest rates could see too many borrowers default on their home loans, triggering wider economic consequences.
Since then, APRA has regularly reviewed its mandated serviceability buffer. It was last changed in October 2021 when it was raised from 2.5% to 3%. During that period, Australia’s cash rate – the benchmark used for setting home loan interest rates – rose from 0.1% to 4.35% between mid-2022 and late-2023.
How is the serviceability buffer applied to my home loan?
When you apply for a loan, banks take into account many factors including your income, living expenses, and any existing debt and measure this against the size of the home loan you’re asking for. As part of their calculations, they’re required to assess whether you’d be able to make your repayments if interest rates or your financial circumstances were to change.
The serviceability buffer is added on top of the rate of the loan product you’re applying for. It sees you assessed as if you’d be required to pay an interest rate 3% higher than the one you’d actually need to pay.
This can effectively rule some applicants out and has prompted some banks to criticise the serviceability buffer, saying it locks some people out of the housing market, particularly first home buyers and lower-income applicants.
Which lenders apply the serviceability buffer?
APRA’s serviceability buffer applies to banks, credit unions, and building societies, collectively known as authorised deposit-taking institutions (ADIs). However, APRA doesn’t regulate non-bank lenders, which instead fall under the regulatory framework of the Australian Securities and Investments Commission (ASIC).
See also: Are non-bank lenders safe?
ASIC requires its credit licensees to observe responsible lending obligations. Non-bank lenders must still observe serviceability buffers in their assessments. However, they tend to have more flexibility in setting buffer rates, but typically only when other conditions are met.
Is there any flexibility in the serviceability buffer for banks?
APRA makes some provisions for banks to waive or reduce the serviceability buffer in certain circumstances, effectively allowing them to assess home loans on a case-by-case basis. A so-called ‘exception to policy’ can occur when a bank decides to approve a home loan that doesn’t meet its standard criteria which can include the serviceability buffer.
Such exceptions are permitted under APRA regulations as long as they are “limited and managed prudently”. In some cases, banks can choose to consider other indicators of a borrower’s capacity to pay back a home loan. This may include a good repayment history or a large deposit. In the past, APRA has estimated serviceability exceptions accounted for around 2% to 3% of total lending for housing, but this rose to around 5% in 2024.
Meanwhile, ASIC’s responsible lending guidelines state it may be reasonable to relax the buffer for cases of like-for-like refinancing if a customer’s new financial obligations can reduce their current repayment schedule and improve their overall financial position. In these cases, some non-bank lenders may apply a buffer as low as 1%, although others will be guided by their own internal lending policies.
What do banks say about the serviceability buffer?
The serviceability buffer has been the subject of debate among Australia’s banks in the decade since its introduction. While major lenders agree it’s well-intentioned, there have been regular calls to reduce the buffer to allow more borrowers to access finance.
As part of a 2024 Senate inquiry into Australia’s financial regulatory framework, National Australia Bank called on APRA to lower the buffer rate as part of a suite of changes to make it easier for first home buyers to enter the market.
ANZ CEO Shayne Elliott has also been a critic of the serviceability buffer, telling the inquiry it was “absurd” banks had to apply a 3% buffer when making home loan serviceability calculations but weren’t permitted to factor in a likely increases in incomes for many young professional applicants.
He said lending regulations were increasingly “locking out” middle Australia from being able to access credit.
Mr Elliott also noted ANZ’s borrowers were becoming increasingly wealthier, partly because the serviceability buffer was making it harder for lower- to middle-income earners to prove they could handle a larger mortgage.
But not all the big banks were in agreement. In its submission, Westpac said the current financial regulation settings were “not a major inhibitor to home ownership and should not be a focus of policy debate”.
Australia’s biggest home lender, CommBank, also took a more cautious approach in its submission to the inquiry, saying any changes to the current regulatory framework “must be balanced with the current performance of mortgage holders in this higher interest rate environment”.
See also: APRA upholds serviceability buffer amid first home buyer challenges
What can borrowers do to meet the serviceability buffer?
If you’re applying for a mortgage and find yourself on the wrong side of the serviceability buffer, there are a number of ways you can try to increase your home loan serviceability. These include:
- Increasing your income: While this can mean finding better paid employment, it can also entail taking on ongoing part-time work or creating a regular income stream from a side gig (although not all lenders will be willing to consider all side gigs as steady income).
- Cutting expenses: This is arguably a more achievable option. It entails reviewing all your living expenses and cutting unnecessary spending.
- Reduce debt: This can also be effective in improving your chances of meeting serviceability requirements. If you’re paying a car loan, look to sell and downgrade to a cheaper vehicle, preferably one you can pay for outright. Paying off any high-interest credit card debt is also a must.
See also: Helpful guides on how to increase your borrowing capacity
- Use a mortgage broker: A mortgage broker can help match you to a lender who may be willing to look upon your financial circumstances more favourably and apply a lower serviceability buffer in assessing a home loan application.
See also: How to find a mortgage broker
Image by mediamodifier via Unsplash
Collections:Buying a homeHome Loan Appl
Home Warranty Insurance: What it covers, costs, and key limitations
Published on 29 Jan 2025
If you’re building a new home, you might have come across home warranty insurance, home building compensation, or domestic building insurance. Here’s how it can protect you.ON THIS PAGEWho pays for home warranty insurance?How much does home warranty insurance cost?How does home warranty insurance differ between states and territories?NSW: Home Warranty InsuranceVictoria: Domestic building insuranceQueensland: Home Warranty SchemeSouth Australia: Building indemnity insuranceWestern Australia: Home indemnity insuranceTasmania: Home Warranty Insurance SchemeACT: Builders Warranty Insurance or Home Owners WarrantyNorthern Territory: Residential building insurance
It’s home warranty insurance, though it’s often called something else. Common names include home building compensation, home indemnity insurance, and domestic building insurance.
It ensures homeowners aren’t left out of pocket if their builder fails to complete a project or rectify defects for certain reasons. Here’s how it works:
What is home warranty insurance?
In most states and territories, home warranty insurance protects you and your home build or renovation if your builder goes missing, dies, goes bust, or loses their licence. It’s usually taken out by the builder or contractor on behalf of the homeowner before the construction starts.
This insurance is required in most Australian states and territories for residential building projects over a certain cost. It typically provides coverage of non-complete (that is, the project isn’t finished) and defects for around six years or so following its completion. Exact rules, regulations, and insurance products vary between states and territories.
Before signing a contract, ask your builder for proof of coverage.
Key limitations of home warranty insurance
If your builder or contractor abandons the project but hasn’t died, disappeared, gone bankrupt, or lost their licence, home warranty insurance likely won’t cover you – except in Queensland. In such cases, pursuing legal action may be your best option to recover lost funds.
Who pays for home warranty insurance?
The builder or contractor engaged by a homeowner is typically responsible for getting and paying for home warranty insurance. As they’re running a business, builders can be expected to pass on the cost to homeowners, either directly or indirectly.
Only registered builders and contractors working on structural projects over the state-specific cost threshold generally need this insurance. Smaller renovations in which building works don’t meet thresholds may not require coverage – even if other costs (such as additional trades) push it over limits.
If home warranty insurance is needed, it normally needs to be taken out before a builder or contractor takes a deposit or starts work.
How much does home warranty insurance cost?
Just as home warranty insurance differs across the country, so too do its costs. However, it will likely depend on the value of the works a homeowner is agreeing to.
For instance, a $100,000 contract in Sydney might cost a builder around $1,000 to insure, while a similar renovation in Queensland could cost a little over $900 to cover.
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Important Information and Comparison Rate Warning
How does home warranty insurance differ between states and territories?
The rules for home warranty insurance vary across Australia. For instance:
- In NSW and Victoria it’s known as Home Building Compensation Fund (NSW) or Domestic Building Insurance (Victoria) and is mandatory for projects over $20,000 (NSW) or $16,000 (VIC).
- In Queensland it’s covered under the Queensland Building and Construction Commission (QBCC) insurance scheme.
- Other states and territories have similar schemes with varying thresholds and requirements.
NSW: Home Warranty Insurance
Builders and tradespeople in NSW must take out Home Building Compensation Fund (HBCF) cover on any home building project valued at $20,000 or more.
It protects homeowners in the event their builder or tradesperson dies, disappears, goes bust, or has their licence suspended.
It offers up to $340,000 of compensation for impacted homeowners.
Victoria: Domestic building insurance
Victoria demands building contractors take out domestic building insurance – previously called builders warranty insurance – for any works worth over $16,000.
The insurance covers up to $300,000 of costs a homeowner might face if their builder dies, disappears, or goes bust before works are complete or defects are addressed.
Queensland: Home Warranty Scheme
Queensland’s Home Warranty Scheme is a not-for-profit insurance setup administered by the Queensland Building and Construction Commission. Most residential building works worth more than $3,300 (inclusive of materials, labour, and GST) must be insured through the scheme.
Unlike similar insurance products in other states and territories, Queensland builders don’t need to die, disappear, or go bust for homeowners to access coverage.
Those signing a fixed price contract are covered if their contractor doesn’t, or can’t, finish the project. In some cases, if a homeowner’s claim is accepted and their home is later damaged by fire, storm, vandalism, or theft, related losses will also be covered. Homeowners agreeing to either a fixed price or cost-plus contract are also covered if their contractor doesn’t amend defects or if their home is impacted by subsidence or settlement.
The Home Warranty Scheme pays out a maximum of $200,000 or up to $300,000 if an owner takes out optional extra coverage.
South Australia: Building indemnity insurance
In South Australia, builders undergoing projects that both need development approval and cost $12,000 or more must pay for a building indemnity insurance policy in the homeowner’s name.
It protects the owner if their builder dies, disappears, or goes bust before finishing the works.
The insurance offers protection of up to $80,000 if issued before mid-2017 and up to $150,000 if issued since mid-2017.
Western Australia: Home indemnity insurance
Builders undergoing residential works worth more than $20,000 in Western Australia must take out home indemnity insurance on behalf of the homeowner.
The insurance protects the owner if their builder were to die, disappear, or go bust.
Insurance policies must provide up to $200,000 of cover for non-completion or statutory warranty and up to $40,000 for loss of deposit.
Tasmania: Home Warranty Insurance Scheme
The Tasmanian Government announced it will reinstate its Home Warranty Insurance Scheme in 2024, with the safety net expected to come into effect in mid-2025.
It proposes that building contractors would be required to take out the insurance product for every residential building contract worth more than $20,000.
“The Government’s Home Warranty Insurance scheme will provide important protections to ensure that homeowners are covered for loss caused by incomplete or defective building work should unforeseen circumstances occur, such as where their builder has died, disappeared or become insolvent,” Tasmanian minister for small business and consumer affairs Michael Ferguson said in August 2024.
ACT: Builders Warranty Insurance or Home Owners Warranty
Builders in the ACT must take out Builders Warranty Insurance – often called Home Owners Warranty – if a residential project requires building approval and costs at least $12,000.
It offers the homeowner up to $85,000 of coverage in the case that their builder dies, disappears, or goes bust.
Northern Territory: Residential building insurance
All builders in the Top End must be registered with a level of coverage through the Fidelity Fund NT each year and secure a certificate of coverage when working on new houses, units of up to three stories, and extensions worth more than $12,000.
The fund is administered by the Master Builders Association Northern Territory and provides up to $200,000 of coverage (no more than 20% of the project’s value) if a homeowner’s builder dies, disappears, becomes insolvent, or has their registration suspended or cancelled.
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