Serviceability Buffer: a Worked Example

A loan is approved on one day and repaid over decades. The rate on the day of approval is the one fact about the loan's future the lender knows will change. A borrower who can only just meet today's repayment has no room for a rise, a drop in income or a new cost. The buffer builds that room into the approval itself: the lender approves the loan only if the borrower could carry a higher repayment than the one it will actually charge.

The buffer is not a forecast. A lender testing at 3 points above the loan rate is not predicting a 3-point rise. It is choosing how much shock the borrower should be able to absorb before falling behind, and the answer governs how much it lends to everyone it tests.

The surplus is the borrower's income after tax, less living costs and repayments on other debts, all as the lender assesses them. Who sets the buffer differs by market. In Australia, APRA requires the banks and other deposit-takers it regulates to assess new home-loan borrowers at a rate at least 3 percentage points above the loan's rate, allowing exceptions only if they are limited and monitored; non-bank lenders are outside that requirement. Since February 2026 APRA has also capped the share of each bank's new owner-occupier and investor lending at six or more times income at 20%. In New Zealand, banks choose their own test rates, and the Reserve Bank's debt-to-income restrictions, in force since July 2024, separately cap at 20% the share of each bank's new lending to owner-occupiers borrowing more than six times income, and to investors borrowing more than seven times. In the UK, the Bank of England withdrew its 3-point affordability test from 1 August 2022; lenders remain bound by the FCA's rules to take account of likely rate rises over at least the first five years, unless the rate is fixed for that long.

A couple who own a picture-framing business, constructed for this page like every figure in it, apply to a bank in Australia for a US$640,000 home loan over 30 years at 6.1%. After tax, living costs and their other commitments, the bank assesses that they have US$4,900 a month available for repayments. The 6.1% rate is the example's; the 3-point buffer is the Australian minimum.

On today's rate the couple have more than US$1,000 a month to spare. On the test rate they are short. The bank offers about US$603,600, and the buffer has taken roughly a quarter off what the same income would support at the actual rate. The couple will repay US$3,658 a month on the smaller loan at 6.1%, leaving them the room the test was designed to keep.

Business lenders apply the same idea to cover ratios, and in all three markets the test rate is the lender's own. A credit paper sets the debt service coverage ratio at the actual rate beside the same ratio at a sensitised one. Suppose the couple's business borrowed a US$5.0m term loan at 6.5%, repaid at US$400,000 a year, from US$1.1m of cash available for debt service, all figures the example's:

The sensitised figure tells the credit committee what a rise would do to the borrower's margin of safety, and whether a hedge is worth requiring. Unlike the Australian home-loan buffer, there is no prescribed level: the size of the shock is the lender's judgment, and different banks test different moves.

DEFINED IN ONE PARAGRAPH → · SERVICEABILITY → · THE QUESTION ON IT →

It decides the size of the loan more often than whether there is one. Borrowers who fail a buffered test are often offered less, asked for a larger deposit, or asked to clear other debts first. Credit card limits are a common example: lenders commonly assess a repayment on the full limit, so cancelling an unused card can lift what a borrower passes for.

It also decides how a refinance is read. A borrower moving to a lender who will test at a buffer again may find that the loan it already services is larger than the new lender will approve. For a business banker, the buffer matters in a second way: owners' personal borrowing, tested at a buffered rate, sets how much income they need to draw from the business, and that feeds back into the cash the business keeps.