The Australian Prudential Regulation Authority has defended its controversial serviceability buffer, saying it is an important element in maintaining prudent lending standards and that it will stay at 3 per cent. APRA chair John Lonsdale said: “We continually appraise these settings in response to changes in economic conditions. APRA’s assessment is that the serviceability buffer level remains appropriate in the current environment.” Lenders must apply the buffer when assessing a loan application, to see whether the borrower could continue to service the loan if the rate went up by 3 percentage points from the lending rate. The buffer was increased from 2.5 per cent to 3 per cent in late 2021. Critics have argued that the buffer limits refinancing options for borrowers, making them “mortgage prisoners”, and may indirectly cause financial stress.  They also argue a 3 per cent buffer may have been appropriate when rates were at historic lows, but with the rate tightening cycle almost completed a buffer that implies rates could rise a further 3 per cent is unrealistic. In his remarks to the Senate Economics Legislation Committee this week, Lonsdale said: “We are attuned to concerns for some borrowers who may have fewer options for refinancing their existing loan with another lender, for what could be a variety of reasons. For some, the impact of rising rates may have resulted in less favourable serviceability results. Others might be impacted by declining house process or changed personal finances. “Where sound borrowers do not fit standard lending criteria, APRA’s framework does not prohibit banks from lending to these borrowers. APRA expects banks to have prudent limits, controls and justifications for exceptions to lending policy and for these loans to be monitored closely.” In February, when APRA released a review of its macroprudential settings, it said the objective of the serviceability buffer is to ensure that banks make prudent lending decisions, lending to borrowers who are able to repay their loans in a range of scenarios.  “The buffer provides a contingency not only for rises in interest rates over the life of the loan, but also for any unforeseen changes in a borrower’s income or expenses,” it said.