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





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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Learn more about home loans

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

Does each product always have the same rating?

No, the rating you see depends on a number of factors and can change as you tell us more about your loan profile and preferences. The reasons you may see a different rating:

  • Lenders have made changes. Our ratings show the relative competitiveness of all the products listed at a given time. As the listing change, so do the ratings.
  • You have updated you profile. If you increase your loan amount, the impact of different rates and fees will change which loans are the lowest cost for you.
  • You adjust your preferences. The more you search for flexible loan features, the more importance we assign to the Flexibility Score. You can also adjust your Flexibility Weighting yourself, which will recalculate the ratings with preference given to more flexible loans.

What is a valuation and valuation fee?

A valuation is an assessment of what your home is worth, calculated by a professional valuer. A valuation report is typically required whenever a property is bought, sold or refinanced. The valuation fee is paid to cover the cost of preparing a valuation report.

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

Savings over

Select a number of years to see how much money you can save with different home loans over time.

e.g. To see how much you could save in two years by switching mortgages,  set the slider to 2.

Mortgage Calculator, Repayments

The money you pay back to your lender at regular intervals. 

Mortgage Calculator, Repayment Type

Will you pay off the amount you borrowed + interest or just the interest for a period?

What is appreciation or depreciation of property?

The increase or decrease in the value of a property due to factors including inflation, demand and political stability.

What is a fixed home loan?

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

What is the flexibility score?

Today’s home loans often try to lure borrowers with a range of flexible features, including offset accounts, redraw facilities, repayment frequency options, repayment holidays, split loan options and portability. Real Time Ratings™ weights each of these features based on popularity and gives loans a ‘flexibility score’ based on how much they cater to borrowers’ needs over time. The aim is to give a higher score to loans which give borrowers more features and options.

Mortgage Calculator, Loan Term

How long you wish to take to pay off your loan. 

Mortgage Calculator, Loan Purpose

This is what you will use the loan for – i.e. investment. 

Why should you trust Real Time Ratings?

Real Time Ratings™ was conceived by a team of data experts who have been analysing trends and behaviour in the home loan market for more than a decade. It was designed purely to meet the evolving needs of home loan customers who wish to merge low cost with flexible features quickly. We believe it fills a glaring gap in the market by frequently re-rating loan products based on the changes lenders make daily.

Real Time Ratings™ is a new idea and will change over time to match the frequently-evolving demands of the market. Some things won’t change though – it will always rate all relevent products in our database and will not be influenced by advertising.

If you have any feedback about Real Time Ratings™, please get in touch.

Mortgage Calculator, Deposit

The proportion you have already saved to go towards your home.