Does a rate cut mean I can borrow more?

A little, if your lender passes it on. Lenders assess you at the product rate plus a buffer of at least 3 percentage points, so a 0.25 point cut takes the assessment rate from around 9.1 per cent to around 8.9 per cent. Over a 30-year term that lifts the maximum loan a fixed monthly surplus supports by roughly 2.3 per cent, or about $15,000 on a $675,000 capacity.

What is the serviceability buffer and who does it apply to?

It is the margin a lender adds to the actual loan rate before testing whether you could afford the repayments. Since October 2021 APRA has expected authorised deposit-taking institutions to assess new borrowers at a rate at least 3.0 percentage points above the loan product rate. It applies to new lending, and it is the reason the rate that determines your borrowing capacity is always higher than the rate you would be charged.

Will my HECS debt stop me getting a home loan?

It does not stop you, but it reduces the surplus a lender works with. The compulsory repayment is set by your income: on the ATO's 2024-25 thresholds, repayment income of $95,000 carries a 5.5 per cent repayment, about $435 a month. At an 8.89 per cent assessment rate that absorbs roughly $54,650 of borrowing capacity. APRA has consulted on letting banks exempt debts due to be repaid soon, but has not finalised it.

What is HEM and why does my bank use it instead of my actual spending?

HEM is the Household Expenditure Measure, a benchmark of household spending published by the Melbourne Institute. ASIC's Regulatory Guide 209 describes it as the expense benchmark lenders use most often, and notes that the way it is built means most households spend more than the benchmark figure. Lenders compare it against your declared expenses as a plausibility check. The guide does not require it to be applied as a minimum.

Do my repayments drop automatically when the RBA cuts the cash rate?

No. The cash rate is not your loan rate. Each lender decides whether to pass a change on, by how much and from what date, and a fixed rate does not move during its fixed term. Even where a variable rate is reduced, some lenders leave the scheduled repayment unchanged unless you ask them to recalculate it, in which case the difference goes to principal.

Does the serviceability buffer apply when I refinance?

Yes. To the incoming lender a refinance is new lending, so the same assessment applies, buffer included. Lenders can approve loans outside their standard criteria as exceptions, but those sit within internal risk limits and are not something to count on. If your income, expenses or rates have changed since the original loan, the assessment can land somewhere different from last time.

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The RBA's second cut: what 3.85% does to your borrowing capacity

The Monetary Policy Board cut the cash rate to 3.85 per cent on 20 May 2025. Because APRA expects lenders to test you at least 3 percentage points above the rate you would pay, a 0.25 point cut lifts borrowing capacity by around 2.3 per cent, less than a HECS debt takes away.

By Andy Giobbi, Financial Planner / Director

21 May 2025

Key points

The Reserve Bank's Monetary Policy Board lowered the cash rate target by 25 basis points to 3.85 per cent on 20 May 2025, the second cut of the cycle after February's reduction from 4.35 per cent to 4.10 per cent.
APRA expects lenders to assess a new borrower at an interest rate at least 3.0 percentage points above the actual loan rate, so the rate that sets your borrowing capacity is never the rate you pay.
A 0.25 percentage point fall in the assessment rate lifts the maximum loan a fixed monthly surplus supports by about 2.3 per cent over a 30-year term, or roughly $15,250 on a $675,000 capacity.
A compulsory HELP repayment of $435 a month absorbs about $54,650 of borrowing capacity at an 8.89 per cent assessment rate, more than three times what the May cut returned.
Lenders test declared living expenses against a benchmark, most commonly the Household Expenditure Measure, whose construction means most households spend more than the benchmark figure.

If you are working out what you can borrow, yesterday's decision changes the arithmetic, but by less than the headline suggests. The Reserve Bank's Monetary Policy Board lowered the cash rate target by 25 basis points to 3.85 per cent on 20 May 2025, the second cut of this cycle. A quarter of a percentage point off the rate you would pay lifts your maximum loan by roughly two to three per cent, nowhere near what most people assume. The reason sits in a rule that rarely leaves the lending desk: the rate a lender tests you against is not the rate you would actually be charged.

What the Monetary Policy Board decided

The Board cut the cash rate target by 25 basis points to 3.85 per cent, following February's reduction from 4.35 per cent to 4.10 per cent. Its stated reasoning was inflation. The Board's statement on the decision records that annual trimmed mean inflation was 2.9 per cent, "below 3 per cent for the first time since 2021", and that headline inflation of 2.4 per cent sat inside the 2 to 3 per cent target band. Those figures come from the Australian Bureau of Statistics' March quarter Consumer Price Index, released on 30 April 2025.

The Board also judged that "the risks to inflation have become more balanced", with international developments, tariffs and the associated volatility in financial markets expected to weigh on growth, employment and inflation in Australia. It described the move as making monetary policy "somewhat less restrictive", which is a careful choice of words, because less restrictive is not the same thing as supportive.

What the Board did not do is signal a path. Its statement says only that it "will be attentive to the data and the evolving assessment of risks to guide its decisions". Nobody, the Board included, knows where the cash rate goes from here.

The number a lender is actually solving for

Serviceability assessment is closer to a subtraction problem than a lending decision. A lender starts with your verified income and takes out tax. Then it takes out an assessed figure for living expenses. Then it takes out your existing commitments: other loan repayments, a notional repayment on the full limit of every credit card whether you use it or not, and any compulsory study loan repayment. What remains each month is your surplus.

That surplus is then converted into a loan amount, being the largest debt whose repayment the surplus could cover over the loan term at an assessment rate. Everything that matters happens in the last three words. Change the assessment rate and the same surplus buys a different amount of debt. Change the surplus and it buys a different amount again, usually by more.

This is why two people on identical incomes can be given very different numbers on a home loan application. Income is only the first line of the calculation.

The buffer, and why a cut moves less than you expect

Since October 2021, APRA has expected lenders to "assess new borrowers' ability to meet their loan repayments at an interest rate that is at least 3.0 percentage points above the loan product rate". That is the serviceability buffer. It applies to authorised deposit-taking institutions, which is to say the banks, mutuals and credit unions that write most Australian mortgages.

So if the rate on offer is around 6.1 per cent, the rate you are tested at is around 9.1 per cent. When the product rate falls by 0.25 percentage points, the assessment rate falls by 0.25 percentage points as well, from about 9.1 to about 8.9. Measured against the rate doing the work, that is a move of under three per cent, and the effect on your maximum loan is of a similar order.

APRA measured the same relationship from the other direction when it set the current buffer. It estimated that lifting the buffer by 0.5 percentage points would "reduce maximum borrowing capacity for the typical borrower by around 5 per cent". A quarter of a percentage point is half that size, running the other way.

A worked example: what 0.25 per cent actually moved

Take a couple buying in Robina. The figures below are an example rather than a quote, and every input is an assumption.

Assume that after tax, assessed living expenses and existing commitments, the lender calculates a monthly surplus of $5,500. Assume a 30-year principal-and-interest term, and a product rate of 6.14 per cent before the cut, giving an assessment rate of 9.14 per cent.

At a 9.14 per cent assessment rate, $5,500 a month supports a loan of about $675,000.
At 8.89 per cent, with the same surplus and the same term, it supports about $690,000.

The difference is roughly $15,250, or 2.3 per cent. That is what full pass-through of the cut is worth to this couple's borrowing capacity. It is a real amount of money, and it is a good deal less than most people expect a rate cut to produce.

Where a HECS-HELP debt fits

A compulsory study loan repayment behaves unlike other debt: the amount is set by your income, not by the size of the balance. Under the ATO's 2024-25 study and training loan repayment thresholds, repayment income between $94,504 and $100,174 carries a compulsory repayment of 5.5 per cent of that income. On repayment income of $95,000, that is $5,225 a year, or about $435 a month.

Run $435 a month back through the same calculation. At an 8.89 per cent assessment rate over 30 years, $435 a month supports about $54,650 of debt. The HELP repayment is therefore absorbing more than three times the capacity the May cut just handed back.

That gap is why the treatment of HELP debt has become a live regulatory question. On 20 February 2025, APRA began consulting on proposed changes that would clarify that banks "may exempt a loan applicant's HELP debt from their serviceability assessment in cases where a borrower is expected to pay off their HELP debt in the near term", and would remove HELP debts from debt-to-income reporting. APRA said it expected the final changes to be incorporated into its prudential framework in the second half of the year.

This is a proposal under consultation, not a rule. Whether any particular lender has changed its policy is a question for that lender, and the answer now may not be the answer later in the year.

Living expenses and the HEM benchmark

The other large input is expenses, and lenders do not simply accept the figure you declare. ASIC's Regulatory Guide 209 on responsible lending conduct records that the benchmark most commonly used is the Household Expenditure Measure, published by the Melbourne Institute of Applied Economic and Social Research. The guide explains how it is built: a median of "absolute basic" spending combined with the 25th percentile of spending on "discretionary basic" items, with the result that "the majority of households would spend more than the benchmark figure".

Two things follow from that. Declared expenses well below the benchmark tend to invite questions and documents rather than acceptance. But the guide is also explicit that the benchmark need not be treated as a floor. It states that "it is not necessary to use a benchmark as a minimum level of expenditure for an individual consumer" where a lower figure has been properly verified.

The same discipline applies to your other commitments. A credit card is generally assessed on its limit rather than its balance, so an unused $15,000 limit still reduces the surplus every month. The structure of personal debt moves a serviceability result considerably more than a 0.25 percentage point change in rates does.

What changes on a loan you already have

The cash rate is not your rate. Lenders set their own pricing, and a change in the cash rate is passed through at each lender's discretion, in an amount and from a date it chooses. Until your lender tells you otherwise, nothing on your loan has changed.

Where a variable rate is reduced, some lenders leave the scheduled repayment where it is unless you ask them to recalculate it. If that happens, the difference goes to principal instead of to your transaction account. A fixed rate does not move at all during its fixed term.

An existing pre-approval was assessed at the old assessment rate. It does not re-price itself, and no lender is obliged to reissue it on better terms.

Borrowing capacity is also, for many people, not the binding constraint. First home buyers are frequently limited by the deposit and the loan-to-value ratio well before servicing becomes the issue, in which case a change in the assessment rate moves a number that was never the limit. Which of the two is actually binding is the first question worth answering, and it is a different question again depending on whether you are buying, refinancing or borrowing for a business. That is where our lending work starts.

Common questions

Does a rate cut mean I can borrow more?: A little, if your lender passes it on. Lenders assess you at the product rate plus a buffer of at least 3 percentage points, so a 0.25 point cut takes the assessment rate from around 9.1 per cent to around 8.9 per cent. Over a 30-year term that lifts the maximum loan a fixed monthly surplus supports by roughly 2.3 per cent, or about $15,000 on a $675,000 capacity.
What is the serviceability buffer and who does it apply to?: It is the margin a lender adds to the actual loan rate before testing whether you could afford the repayments. Since October 2021 APRA has expected authorised deposit-taking institutions to assess new borrowers at a rate at least 3.0 percentage points above the loan product rate. It applies to new lending, and it is the reason the rate that determines your borrowing capacity is always higher than the rate you would be charged.
Will my HECS debt stop me getting a home loan?: It does not stop you, but it reduces the surplus a lender works with. The compulsory repayment is set by your income: on the ATO's 2024-25 thresholds, repayment income of $95,000 carries a 5.5 per cent repayment, about $435 a month. At an 8.89 per cent assessment rate that absorbs roughly $54,650 of borrowing capacity. APRA has consulted on letting banks exempt debts due to be repaid soon, but has not finalised it.
What is HEM and why does my bank use it instead of my actual spending?: HEM is the Household Expenditure Measure, a benchmark of household spending published by the Melbourne Institute. ASIC's Regulatory Guide 209 describes it as the expense benchmark lenders use most often, and notes that the way it is built means most households spend more than the benchmark figure. Lenders compare it against your declared expenses as a plausibility check. The guide does not require it to be applied as a minimum.
Do my repayments drop automatically when the RBA cuts the cash rate?: No. The cash rate is not your loan rate. Each lender decides whether to pass a change on, by how much and from what date, and a fixed rate does not move during its fixed term. Even where a variable rate is reduced, some lenders leave the scheduled repayment unchanged unless you ask them to recalculate it, in which case the difference goes to principal.
Does the serviceability buffer apply when I refinance?: Yes. To the incoming lender a refinance is new lending, so the same assessment applies, buffer included. Lenders can approve loans outside their standard criteria as exceptions, but those sit within internal risk limits and are not something to count on. If your income, expenses or rates have changed since the original loan, the assessment can land somewhere different from last time.