Mortgage stress testing
(And why it has everything to do with how much you can borrow)
Mortgage stress testing
Do you know the one thing that makes most “how much can I borrow“ calculators inaccurate? If not completely misleading?
I’ll tell you what that is right now.
It’s stress testing. Mortgage stress testing.
Both lenders and us brokers need to make sure a borrower can afford to repay their loan at a higher interest rate.
The interest rate tested, isn’t sexy.
It’s not a rate you’d want to pay.
But you need to make sure you can afford to pay back the loan at that rate.
This means knowing what your living costs are. It means having a real budget that correlates with how you actually spend your money. While budgeting isn’t particularly easy or fun, it’s important.
Even though home loan stress testing is never talked about, I’ll show you where you can find a passing reference to it.
The Australian Securities and Investments Commission (ASIC) runs a website called MoneySmart. The MoneySmart website helps consumers make better decisions about their finances. They have a webpage with a “how much can I borrow” calculator.
The mortgage calculator allows you to enter an affordable repayment amount, loan term and interest rate. The calculator will show you how much you can borrow, including the likely total interest that will be paid over the life of the loan.
Now, if you click on the tab down the page titled “Disclaimer and Assumptions”, you’ll notice one of the assumptions states:
“To help you consider the impact of interest rates changes, we suggest exploring the impact of a 2% interest rate rise. Interest rates could rise in future by more than 2%.”
I bet you’ve already been to lender websites and tried their calculators? Correct?
How many times did they mention stress testing?
The reality is, home loans are stress tested at a higher rate than just 2% above the advertised rate. And different lenders often stress test at different rates.
Our mortgage repayment calculator is different.
As a mortgage broker, we can see the actual rate the different lenders stress test their home loans at.
By default, we use the highest stress tested rate of all the lenders, and we show you what that means.
For example, one borrower may want to minimise the total interest over the life of their loan above all other factors.
Whereas another borrower may want to maximise how much they can borrow, above all else.
What are your loan objectives?
- Mortgage stress testing
- Mortgage stress test calculator
- Why is home loan stress testing important?
- What’s the benefit of to you of mortgage stress testing?