When applying for a home loan in Australia, many borrowers assume the bank simply checks their ability to repay based on the advertised interest rate. In reality, that is not the case.
Banks apply an additional “serviceability buffer” — typically around 3% above the actual interest rate — when assessing your borrowing power.
How It Works
If a lender is offering a 6% home loan rate, they will not assess your repayments at 6%. Instead, they will test your ability to repay at:
6% + 3% buffer = 9% assessment rate
This means your income and expenses are measured against a much higher repayment scenario, to ensure you could still service the loan if rates increase in the future.
Why It Matters
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Lower borrowing power: Many Australians are surprised when they qualify for a smaller loan than expected.
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Market impact: The buffer reduces the maximum amount households can borrow, which also influences property demand.
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Strategic planning required: Knowing about the buffer in advance helps you manage expectations and structure your finances more effectively.
Example
A household with a combined income of $120,000 may believe they can borrow close to $700,000 at a 6% interest rate.
However, once the bank applies a 9% assessment rate, their borrowing capacity could drop to around $550,000 — a significant difference.
Key Takeaway
Your borrowing power is not determined by the advertised rate alone. The assessment buffer is a major factor in how much you can borrow, and understanding it upfront can help you avoid disappointment and prepare more strategically.
Need clarity on your true borrowing capacity?
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Email: support@sw-globalfinance.com.au