Record low cash rates lead banks to increase loan buffers

With cash rates at a record low 2.5% for the past 2 months, lenders and mainstream banks are pushing the panic button.

Banks in the country are pushing for an increase of interest rate buffers, an amount originally ranging from 1.25% to 2%, used as a key indicator whether the borrower has the capacity to pay within that buffer range due to market changes. This is an initiative pushed by the Reserved Bank of Australia, after cutting interest rates due to the record low cash rate. Banks are encouraged to maintain their lending standards, with the influx of borrowers due to the low interest rates as it is forecasted that these interest rates will eventually return to its normal levels.

It is a little known fact that when lenders service home loans they add a buffer on in case rates go up. Some lenders cap theirs when rates get too low. ING Direct, for example has stopped at 8%. It doesn’t matter how low rates go, you have to pass their serviceability calculator at 8% or they won’t give you a loan.

Read more about this on the Financial Review website.