Lenders do not test you at the rate you actually pay
When you apply for a home loan, the lender does not just check whether you can afford repayments at the rate on your loan. They add a on top and test you at the higher number. On the same income, that buffer can slash your borrowing capacity by tens of thousands of dollars before you ever look at a property.
- On a $120,000 household income, the 3% buffer typically reduces borrowing capacity by $80,000 to $120,000 compared to being assessed at the contract rate alone .
- Between May 2022 and November 2023, the RBA raised the cash rate 13 times, from 0.10% to 4.35% .
- From February 2026, APRA caps loans with a of 6 or higher at 20% of new mortgage lending .
That gap can mean the difference between affording the property you want and missing out entirely.
The buffer is the price of rate uncertainty
Interest rates move over the life of a 30-year loan. Borrowers who took out loans in 2021 at rates around 2% saw their repayments jump by more than 50% as the cash rate climbed from 0.10% to 4.35% between May 2022 and November 2023 . The buffer exists so lenders do not approve loans that would put you under severe stress if rates climb.
APRA, the banking regulator, requires all authorised deposit-taking institutions to assess your ability to repay at the loan rate plus a buffer of at least 3 percentage points . APRA increased the buffer from 2.5% to 3% on 6 October 2021, in response to rising household debt and highly leveraged borrowing . In July 2025, APRA confirmed the buffer remains at 3 percentage points, noting it has not been restrictive on new credit to the household sector .
How the buffer reshapes what you can borrow
Here is a concrete example. Say you earn $100,000 a year and apply for a 30-year principal-and-interest loan at 6%.
Assessed at loan rate (6%) | Assessed with buffer (9%) | |
|---|---|---|
Monthly repayment on $600,000 | $3,597 | $4,828 |
Monthly repayment on $500,000 | $2,998 | $4,024 |
At 6%, you might service a $600,000 loan. But the lender assesses you at 9%, where repayments on $600,000 jump to $4,828 a month. If that exceeds what you can afford after living expenses, tax, and other debts, you get approved for less . The buffer does not change what you actually pay. It changes what the lender will let you borrow.
APRA's debt-to-income cap is a second gate you have to clear
From February 2026, APRA introduced an additional constraint. Lenders must now limit loans with a of 6 or higher to no more than 20% of their new mortgage lending . This means if you earn $100,000, a loan of $600,000 or more puts you in the high-DTI category. Lenders have a limited quota for these loans, so even if you pass the serviceability test, your application might be declined or delayed if the lender has already used up its allowance for that quarter .
Loans for the purchase or construction of new dwellings are exempt from the DTI limit . So are bridging loans for owner-occupiers. The DTI cap applies separately to owner-occupier and investor lending portfolios, measured quarterly .
The comparison rate is how the law forces lenders to show their fees
When you see a home loan advertised, you will notice two rates side by side: the interest rate and the . Australian law, through the , requires lenders to display a comparison rate next to every advertised interest rate .
All home loan comparison rates in Australia use a standard example: a $150,000 secured loan over 25 years with monthly principal-and-interest repayments . Every lender uses this same benchmark, which makes the rates directly comparable.
The comparison rate includes:
- The advertised interest rate
- Application and establishment fees
- Ongoing monthly or annual account fees
- Package fees
- Settlement and valuation fees
The comparison rate does not include:
- Government charges (stamp duty, mortgage registration fees)
- Lenders mortgage insurance (LMI)
- Early repayment or break fees
- Redraw fees
- Offset account fees
- Late payment fees
- Fee waivers or cashback incentives
The gap between the two rates is where fees hide
The difference between the advertised rate and the comparison rate tells you how much fees add to the cost of the loan.
Lender | Advertised rate | Comparison rate | Gap |
|---|---|---|---|
Lender A | 5.89% | 5.93% | 0.04% |
Lender B | 5.79% | 6.15% | 0.36% |
Lender C | 6.05% | 6.08% | 0.03% |
Lender B has the lowest advertised rate but the highest comparison rate. The 0.36% gap signals high fees that the headline rate hides. Lender C has the highest advertised rate but a tiny gap, meaning low fees. Depending on your loan size, Lender C could end up cheaper than Lender B.
The comparison rate is a starting point, not a verdict
The standard $150,000 loan used for the calculation is well below the national average of $642,000 . Fixed dollar fees (like a $395 annual package fee) have a bigger percentage impact on a $150,000 loan than on a $642,000 loan. So the comparison rate can overstate the fee impact for larger loans.
The comparison rate also ignores loan features that might save you money, such as an offset account. A loan with a higher comparison rate but a functional offset could cost you less overall.