The serviceability buffer: why lenders test you at a higher rate

Lenders don't just check whether you can afford today's repayments. They check whether you could still afford them if rates rose a long way. That check is the serviceability buffer, often called the stress test.

How it works

APRA, the banking regulator, expects lenders to assess new home loans at an interest rate at least 3 percentage points above the loan's actual rate. A loan at 6% is assessed as if it were at 9%. If your budget works at 9%, the lender treats the loan as serviceable.

What lenders include

• Your income, with some types such as bonuses, overtime or rental income shaded down.
• Your living expenses, or a benchmark minimum if your declared expenses are lower.
• Your other debts, including the limits on credit cards even if they're paid off each month.
• The new loan's repayments at the buffered rate.

Why this matters when refinancing

A refinance with a new lender is a new application, so you're assessed at the buffered rate again. If rates have risen since you borrowed, you may not pass at a new lender even though you've never missed a repayment. Lenders differ in how they assess income and expenses, which is why the choice of lender matters.

Planning around it

• Know your real monthly spending before you apply.
• Pay down or close small debts and unused credit limits.
• Run your budget at the buffered rate yourself. If it works there, the actual repayment should be comfortable.