APRA’s refusal to revise the 3 per cent stress test keeps Aussies locked in mortgage prison

ANALYSIS

If you’re in mortgage prison, you just had a parole hearing. And the result? Parole denied.

That was the outcome when the Australian Prudential Regulation Authority (APRA) announced recently that it would be keeping the 3 per cent mortgage repayment ‘stress test’ buffer in place.

That’s right, we’re not being prudent enough! And we must be regulated.

The buffer dictates that anyone applying for a home loan is ‘stress tested’ at a loan repayment rate 3 per cent higher than what they will actually be paying if successful in their loan application.

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So, if you want to borrow money at 6 per cent, the bank will check your income and financial habits to make sure you could make repayments at 9 per cent interest. You know, just in case there is a series of rate rises. They don’t want you to default and lose that dream home.

Only problem is, for a lot of people, the rule is stopping them getting a home at all.

Let’s be real here. Interest rates are coming down. They are not going to go up 3 per cent in the near term.

The stress buffer started out at 2 per cent in 2014. It went to 2.5 per cent in 2019 on the back of a growth cycle that left many borrowers overexposed to the risk of a market correction.

It was rightly increased to 3 per cent in October 2021 when the official cash rate was at 0.1 per cent and there were variable rate home loans with interest rates below 2 per cent. The only way was up at that time.

Now is a completely different story. We have seen a cost of living crisis, stagnant wages, and rising house prices, yet someone who has somehow managed to scrape a deposit together needs to be able to show they can make repayments at a level not seen from variable interest rates since before the 2008 GFC.

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This is especially difficult for young people, as noted by my colleague Jonathan Chancellor in his Sydney Weekend column, who quoted Michael Sukkar, the Coalition’s shadow housing minster during the 2025 election campaign, criticising APRA’s “one size fits all” rule as preventing nearly 40 per cent of first home buyers from getting a loan. That type of outcome is disastrous for future generations.

But possibly the most absurd thing is that some people already with a mortgage who are struggling to make repayments might see a loan out there with a lower interest rate, but they won’t be able to refinance to it because they don’t pass the stress test. They might be paying 6 per cent currently, but if they wanted to pay 5.5 per cent, they’d have to prove they can pay 8.5 per cent.

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Just that 0.5 per cent difference would save you more than $300 a month on a $1 million mortgage and $114,000 over 30 years.

Granted, there is a workaround for some lenders, who are able to use discretion to assess some borrowers at 1 or 2 per cent buffers, but for those who don’t qualify?

They are stuck in mortgage prison. And it’s looking like APRA hasn’t just left the keys in its ‘other pants’, but has thrown them away altogether. The 3 per cent buffer stayed in place even when the cash rate was at 4.35 per cent and there were borrowers being assessed at 10 per cent in order to get a 7 per cent home loan.

Now that the cash rate and variable rates are both on the way down, adjusting the buffer is becoming less urgent, so expect more borrowers to miss out as APRA stays firm.

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