In recent days (June 2023), two major Australian banks, Westpac and CBA, have announced reductions in the serviceability buffer, from 3% to 1%. This is a small move by banks that most people haven’t noticed, but it carries a significant revelation.

So, what is a serviceability buffer? Let’s give an example. Suppose the loan interest rate is 6%. When banks assess a borrower’s repayment capacity, they use an interest rate higher than 6% to ensure borrowers can handle potential adverse circumstances (such as a rise in cash rate). Previously, the buffer was set at 3%, calculating repayments based on a 9% interest rate. Now, it has been reduced to 1%, calculating repayments based on a 7% interest rate. What revelation does this seemingly small move bring?

1. Everything else is equal, property buyers can borrow more.
2. People with existing loans can more easily refinance to other banks and potentially obtain lower interest rates.
3. The most significant revelation is that banks predict that cash rate increases are now nearing the end! This is not just empty talk by the bank economists; the banks have actually adjusted their own policies, indicating strong confidence in this prediction.