SYDNEY (Reuters) - Australia's banking regulator on Monday said it would retain its strict home loan lending rules amid concern that the level of overall risk to the financial system remained elevated, taking into account an uncertain interest rate and economic outlook.

The Australian Prudential Regulation Authority (APRA) said the outlook was clouded by geopolitical instability and household debt and inflation holding above the central bank's target range.

"Given the uncertain economic and interest rate outlook, including the possibility of higher cost-of-living pressures, it is important that prudent buffers are incorporated in serviceability assessments," APRA Chair John Lonsdale said in a statement.

The regulator will retain its guideline requiring the country's main lenders to assess new borrowers' capacity to meet loan repayments at an interest rate of at least 3 percentage points above the prevailing home loan rate.

The countercyclical capital buffer will remain at 1.0% of risk weighted assets so that banks have an additional capital cushion for stress situations.

(Reporting by Renju Jose in Sydney; Editing by Sonali Paul)