The 3% Serviceability Buffer Explained

The short answer

The 3% serviceability buffer is a rule from APRA (the banking regulator) that requires lenders to check you could still afford your mortgage if interest rates rose by 3 percentage points above the rate you're actually offered. So a loan advertised at 6% is assessed at roughly 9%. Because the test uses a higher rate, your assessed repayments are larger, and your maximum borrowing power typically falls by around 20-25% compared with what the headline rate alone would suggest.

How the buffer works

When you apply for a home loan, the lender doesn't just check whether you can meet repayments at today's rate. APRA requires banks to "assess new borrowers' ability to meet their loan repayments at an interest rate that is at least 3 percentage points above the loan product rate." This is the serviceability buffer, and in its July 2025 review APRA confirmed the buffer stays at 3 percentage points.

The mechanics, in plain terms:

1. The lender takes your actual product rate, say 6%.
2. It adds the 3% buffer to get an assessment (or "floor") rate of about 9%.
3. It works out your repayments at that higher 9% rate.
4. It then checks those inflated repayments against your income, minus your living expenses, existing debts (including credit-card limits), and other commitments.

The buffer exists so that if rates climb after you borrow, you aren't immediately stretched. It's one reason Australian mortgage arrears stay low. The buffer isn't a tax or a fee, since you never actually pay the higher rate; it only ever shrinks the headroom a lender will give you.

Note the buffer is added to your product rate, not a fixed number. If your offered rate is 6.2%, you're assessed near 9.2%; if it's 5.8%, near 8.8%.

Worked example

Suppose a lender's calculator says your income and expenses comfortably support repayments of about $3,597 per month. That figure is exactly the repayment on a $600,000 loan at 6% over 30 years (True Loan's standard scenario).

Without any buffer, you might think you can borrow $600,000. But the lender doesn't assess at 6%. It assesses at 6% + 3% = 9%, and the question becomes: how big a loan produces a $3,597 monthly repayment at 9% over 30 years?

	Without buffer (6%)	Assessed with buffer (9%)
Assessment rate	6%	9%
Monthly budget	$3,597	$3,597
Loan that fits the budget	~$600,000	~$447,000

The same $3,597 budget only supports roughly $447,000 once it's tested at 9%. That's a reduction of about $153,000, around 25% of borrowing power, purely from the buffer.

You can check the maths: the standard present-value formula for a 30-year loan at 9% (0.75% per month, 360 payments) turns a $3,597 monthly payment into a principal of ~$447,000. At 6% the same payment supports ~$600,000.

This is also why borrowing power jumps when rates fall: a lower product rate means a lower assessment rate, so the same income stretches further.

Model this in True Loan

True Loan is a calculator rather than a serviceability tool, but it lets you see the repayment side of the buffer clearly, which is exactly what lenders test.

1. Open the True Loan calculator.
2. Set your loan amount, term and interest rate to your actual offered rate (e.g. $600,000, 30 years, 6%) to see your real repayment.
3. Then open the comparison view and create a second scenario with the rate set 3 percentage points higher (e.g. 9%). The repayment it shows is roughly what a lender uses to test your serviceability.
4. If the buffered repayment looks tight, lower the loan amount in that scenario until the repayment returns to a comfortable level. That approximates your buffer-constrained borrowing power.

If you're weighing how to use spare cash once you've borrowed, remember True Loan has two separate inputs: an Offset balance field (interest accrues on the loan minus your offset balance) and an Extra repayment ($/month) field. Both shorten the loan, but they're modelled independently, so don't combine them into one number.

For the related question of how a falling rate lifts your capacity, see how much more you can borrow when rates drop.

Common questions and mistakes

Does the buffer mean I'll pay 9%? No. You pay your actual rate (6% in the example). The 9% is only used to test affordability.

Is the buffer the same at every lender? The 3% buffer is an APRA minimum, so it applies system-wide, but some lenders apply a slightly larger buffer or a minimum "floor" rate. Figures vary by lender.

Why did my credit-card limit cut my borrowing power so much? Lenders count the limit, not the balance, as a commitment in the buffered test. See how a credit-card limit reduces borrowing power.

Can I borrow more by choosing a longer term? A longer term lowers the assessed repayment, which can lift capacity, though it raises total interest. Income, expenses and existing debts usually matter more. For an income-based view, see how much you can borrow on a $100k salary.

The lender's number differs from True Loan's, why? True Loan models repayments only. A lender also weighs your income, living expenses (often a benchmark like the HEM), other debts and dependants, so its serviceability result will differ.

For a deeper explanation of the buffer and current settings, APRA's macroprudential update and Moneysmart's borrowing guidance are the official starting points.

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These figures are estimates for general information only and are not financial or credit advice. Your actual borrowing power depends on your full financial position and the lender's policies; check official sources such as APRA and moneysmart.gov.au before making decisions.