The Mortgage Stress Test: Why Banks Assess You at a Higher Rate
Banks don't check whether you can afford your loan at today's rate. They check whether you could afford it at a noticeably higher one. That hidden number explains most surprising declines.
What the test rate is
When you apply, the lender works out your repayments at a 'test' or 'servicing' rate, set above the rate you'll pay. If your budget copes at the test rate, the loan passes. If it doesn't, the loan is reduced or declined, even though you could manage the real repayments.
The point is to make sure borrowers can cope if rates rise. A 30-year loan will see several rate cycles, and a household with no margin at today's rate is in trouble at the first increase.
Who sets it
Each lender sets its own and changes it from time to time, usually following the direction of interest rates. Lenders don't always publish it, and two banks can differ by a meaningful amount on the same day.
That difference is one of the main reasons the amount you can borrow varies from lender to lender. We don't list the rates here because they'd be stale within weeks.
What else goes into the sum
The test rate is one input. The rest of the calculation:
| Input | How lenders treat it |
|---|---|
| Income | After tax. Overtime, bonuses, commission and rent may be counted in part. |
| Living costs | Your declared spending, checked against statements, or the lender's minimum figure for your household size if that's higher. |
| Credit cards and overdrafts | Assessed on the limit, not the balance, as though fully drawn. |
| Other loans | Actual repayments on car loans, personal loans and buy-now-pay-later. |
| Student loan | The compulsory deduction from your pay. |
| Loan term | Usually tested over 30 years, shorter if you're older. |
Separately, the Reserve Bank's debt-to-income limits restrict lending above a multiple of your income. You need to pass both.
How to improve your result
- Cut credit card limits to what you need. A $15,000 limit you never use still counts against you.
- Pay off small loans before applying. Removing a car repayment can add a surprising amount of borrowing.
- Tidy three months of spending. Lenders read your statements. Subscriptions you've forgotten and regular gambling transactions both get noticed.
- Document all your income. A second job or boarder income only counts if it can be shown.
- Compare lenders. A lower test rate or a kinder view of your income changes the outcome more than anything you can do to your budget.
Our borrowing power calculator gives a ballpark. An adviser can run the figures through several lenders' calculators for the real spread.
If you fail the test by a little
A small shortfall can often be fixed by a slightly bigger deposit, a cheaper property, clearing a debt, or a lender that tests differently. A large one usually means waiting: for a pay rise, for debts to clear, or for savings to grow.
This article explains how New Zealand lenders generally assess these situations. It is general information, not personalised financial advice, and lender policy changes often — check your own position with a registered adviser. Official sources: Reserve Bank of New Zealand for lending policy and the OCR, and Sorted.org.nz for independent government-backed money guidance.
Stress test rates: common questions
Want to know what you can really borrow?
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