Stress testing your mortgage


With the double whammy of cost of living and mortgage interest rate rises, it’s no wonder many mortgage holders, and those saving to buy their first property, are feeling anxious about meeting their repayments or savings goals.

The best way to check, is to stress test your household budget and mortgage repayment capacity. Your reality may not be as dire as the media leads you to believe.

The first thing to remember is that when mortgage brokers and lenders evaluate how much they could loan you, they assess your borrowing capacity and ability to service your loan assuming mortgage rate increases. This was tightened by APRA in 2021, requiring all new home loan applications to be assessed at an interest rate at least 3 per cent above the loan product rate.

So, if your income and expenses haven’t dramatically changed since then, you should have a buffer built in. If you have had your mortgage for some years and are ahead on your repayments, or have savings in an offset account, you can also draw on these funds to lower your repayments.

Stress test your budget

Both our incomes and expenses change over our lives, so whether you took out your mortgage 12 years or 12 months ago, or are saving to buy in the near future, it’s always a good idea to re-visit your budget every couple of years or at a major life event.

This includes checking your home loan interest rate and repayment structure and defining your property goals. This enables you to see if you’re still on the best loan for your circumstances or on track to buy in your chosen area.

A common measure of mortgage stress is when a household spends 30 per cent or more of its pre-tax income on mortgage repayments. However, every household is different, so it’s important to do your own calculations and work out what mortgage stress is for you and how changing mortgage rates will impact this.

One household, for example, may be able to cope with interest rates at 6 per cent while another may find that impossible. Knowing your numbers means you can recognise when you might need to look for help or make changes to your lifestyle as rates increase. The government’s MoneySmart website has a general budget calculator which can help you with accurate budget planning.

Making room for rate increases

You may want to start cutting back on non-essentials before you really have to; streaming subscriptions, cheaper utility and phone deals, and reducing your credit card debt all make a difference and can help you feel more in control.

It’s also important to consider the type of mortgage you have and if it still offers you the best outcome for your circumstances. If you have a flexible mortgage rate, it might be a good idea to look into fixing it, so you know exactly how much to budget for each month. You could also have a split loan that’s part fixed and part flexible. We can help you work out what type of mortgage structure could be best, moving forward.

The other thing to consider is increasing your income by negotiating a wage rise, evaluating a move in your job or starting that side gig you put on the back burner. Even a small increase in income may reduce the need to cut back on non-essentials and stop you eating into savings or any extra mortgage payments you’ve made.

How interest rates effect what you can borrow

If you’re saving for your first home or interested in an investment property, higher interest rates may reduce your overall borrowing capacity. Most lenders are honouring existing agreed-in-principal amounts, but please get in touch to discuss your current pre-approved amount or what you are likely to be able to borrow moving forward. More than ever, you need to keep up to date with your current buying limit – and stick to it when looking.

What to do if you are concerned about mortgage stress

The first thing is to contact us. We can speak to your lender and provide advice about your options moving forward. You can also access the government’s free financial counselling service via the National Debt Helpline on 1800 007 007.

Please get in touch if you’d like to discuss your current mortgage in light of recent rate increases so we can work with you to ensure you are able to withstand the changing environment – no matter what the news is telling you.