Skip to content

Mortgage Stress Test: Can You Afford Your Loan?

Before approving a mortgage, lenders conduct a “stress test” to ensure you can afford repayments even if circumstances change. Understanding how this works helps you prepare a stronger application.

What is a stress test?

Lenders don’t just check if you can afford your mortgage at today’s interest rate. They assume rates will rise and test whether you could still afford repayments at a higher rate.

How it works:

The current interest rate might be 4.5%. The lender stress-tests at 6.5% (or sometimes 7%). They calculate your repayments at the higher rate and check if your income can support it.

Example:

Loan: AUD 500,000 Current rate: 4.5% Current repayment: AUD 2,533/month Stress test rate: 6.5% Stress test repayment: AUD 3,160/month

Your income must support AUD 3,160/month even though today you’d pay only AUD 2,533/month.

Why they do this:

Rates fluctuate. If you buy at 4.5% and rates rise to 6.5% in 5 years, your repayments jump 25%. Lenders want to ensure you can handle this shock without defaulting.

Serviceability ratio:

Lenders typically assess whether your total debt repayments (mortgage + other debts) don’t exceed 43%–50% of your gross income.

Example:

Gross income: AUD 120,000/year (AUD 10,000/month) Max debt allowed: 43% × AUD 10,000 = AUD 4,300/month Your stress-tested mortgage: AUD 3,160 Other debts (car loan, credit card): AUD 800 Total: AUD 3,960/month

You’re within limits—approved.

If you were AUD 500 over, you might be declined or approved for a smaller loan.

What affects your serviceability:

  1. Income: higher income = larger loan approved
  2. Existing debts: car loans, credit cards, HECS debt all count against your serviceability
  3. Expenses: childcare, child support, alimony reduce your available income
  4. Credit history: poor credit might result in stricter assessment

How to improve your serviceability:

  1. Pay down debts: eliminate credit card balances, pay off car loans before applying
  2. Increase income: if you’re getting a pay rise or second job, wait to apply until it’s confirmed
  3. Reduce expenses: if you have non-essential commitments, cut them before applying
  4. Improve credit file: pay everything on time for 6–12 months before applying
  5. Larger down payment: borrowing less means smaller repayments, easier to pass stress test

Real scenario:

You want to borrow AUD 600,000. Your income is AUD 120,000.

At current rates (4.5%), repayment is AUD 3,040/month. At stress test rate (6.5%), repayment is AUD 3,790/month.

Plus other debts:

  • Car loan: AUD 500/month
  • Credit card (minimum): AUD 200/month
  • Total debt: AUD 4,490/month

Your available serviceability: 43% × AUD 10,000 = AUD 4,300/month

You’re AUD 190 over the limit. The lender declines or asks you to reduce the loan to AUD 550,000.

At AUD 550,000:

  • Stress test repayment: AUD 3,477/month
  • Plus other debts: AUD 4,177/month
  • Within limit of AUD 4,300/month. Approved.

What if you pay off the car loan?

  • Mortgage: AUD 3,790/month
  • Credit card: AUD 200/month
  • Total: AUD 3,990/month
  • Within limit of AUD 4,300/month. Full AUD 600,000 approved.

This shows how valuable paying down other debt is before applying for a mortgage.

Self-employed serviceability:

Self-employed borrowers face stricter assessment. Lenders look at 2+ years of tax returns and average income. They often apply a 20% discount to account for business volatility.

If your average income is AUD 120,000, they might assess you as AUD 96,000.

This significantly reduces your serviceability and borrowing capacity.

Hardship scenarios:

Some lenders assess serviceability assuming you lose income:

  • If you’re a couple, what if one person loses their job?
  • If you’re self-employed, what if business income drops 20%?

Stricter lenders factor these in; more lenient ones don’t.

My perspective:

The stress test is conservative and that’s appropriate. It ensures you don’t overextend yourself into a mortgage you can’t afford if circumstances change.

Use it as a reality check. If the lender says you can borrow AUD 600,000, that doesn’t mean you should. If unexpected events (job loss, illness) would cause hardship on those repayments, borrow less.

The goal: a mortgage you’re comfortable paying even if life throws curveballs.