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How the major banks know if you can afford a home loan

How the major banks know if you can afford a home loan

With the cash rate hovering just above zero, and a widespread expectation that mortgage rates will remain low for a long time, banks have begun slashing the stress test they apply to home loan applications.

What this means is that getting your home loan application approved is that little bit easier.

Previously when someone applied for a home loan, the bank was required to check they could repay their loan at a rate of at least 7 per cent. They did this to make sure people would still be able to meet their monthly mortgage repayments if rates rose.

But with rates at record lows, banks now can set their own ‘floor’ rates, provided people can still repay their loan if rates rose by 2.5 per cent.

A lot of banks don’t typically advertise their interest rate floors, but RateCity research can reveal these are the floors of the following major banks:

Major banks serviceability floors:


Rate floors











Bendigo Bank




Source: RateCity.com.au

How do these changes impact your ability to get a home loan?

The relaxing of home loan assessments means that people will find they can borrow more than they used to be able to – in some cases, tens of thousands more. That’s because when they go to apply for a home loan, most banks are no longer stress testing their application at a rate of over 7 per cent – they’re making sure they can meet their monthly repayments if rates rise by just 2.5 per cent above current prices.

For example, Sophie is looking to take out a $500,000 home loan over 30 years. Her chosen lender is offering a rate of 3.10 per cent which means she’ll need to prove that she can meet the monthly repayments at 5.60 per cent which is $2,870 a month.

If she applied six months ago, she would have had to prove that she could pay off her home loan at 7.25 per cent which is $3,411 a month.



Please keep in mind that would-be borrowers will need to prove they can afford loan repayments, as well as their regular expenses. Individual expenses will differ for each borrower and can be tens of thousands of dollars.

As lenders are now going through would-be borrower’s banking history with a fine-tooth comb, consider sticking to a budget for a least a few months before applying for a home loan.

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This article was reviewed by Business & Finance Writer Rachel Wastell before it was published as part of RateCity's Fact Check process.



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