What is the current stress test rate?

It varies by bank, but typically involves adding 2% to 3% to current rates or using a floor rate of around 7%. Ask your broker for the current rates used by different lenders.

Do stress tests apply to refinancing?

Yes, refinancing applications go through the same assessment process. This can sometimes make refinancing difficult if stress tests have tightened since your original loan was approved.

Is the stress test the same for investment and owner-occupied loans?

The buffer rate is usually the same, but investment loans face additional constraints like rental income shading and stricter LVR requirements. This effectively makes investment loans harder to qualify for.

Can I pass the stress test with interest-only loans?

Banks usually assess on a P&I basis regardless of your actual loan type. However, some banks may be more flexible with established investors who have proven track records.

Investment Property Mortgage Stress Test NZ

The mortgage stress test is one of the most important factors affecting how much you can borrow for investment properties. Understanding how it works helps you plan your purchases and structure your applications.

When you apply for a mortgage, the bank does not just check if you can afford the repayments at today's rates. They test whether you could still afford the repayments if interest rates increased significantly. This is the stress test, and it is designed to protect both you and the bank from future rate rises.

How the Stress Test Works

Banks apply a buffer above current interest rates when calculating your serviceability. The exact buffer varies by bank but is typically structured in one of two ways:

Common Stress Test Methods:

Buffer rate: Add 2% to 3% to the current rate (e.g., if rates are 5%, assess at 7% to 8%)
Floor rate: Use a minimum rate regardless of actual rates (e.g., assess at 7% even if actual rate is 5%)
Combination: Use whichever is higher between buffer and floor

The Impact on Borrowing Capacity

The stress test significantly reduces how much you can borrow compared to your actual repayment costs. Here is an example:

Example:

Assume you have $2,000 per month available for loan repayments:

At 5% (actual rate): This services approximately $375,000 in P&I loans
At 7% (stress test rate): This services approximately $300,000 in P&I loans
Difference: About $75,000 less borrowing capacity due to stress test

For property investors with multiple loans, this effect compounds. Each additional loan is stress-tested, which can significantly limit your ability to add properties.

Why the Stress Test Exists

The stress test is not designed to frustrate you. It exists for good reasons:

Protect borrowers: Ensures you can handle rate increases without financial distress
Financial system stability: Reduces the risk of widespread defaults if rates spike
Regulatory requirements: Banks must demonstrate prudent lending practices
Historical lessons: Past rate cycles have caught borrowers off guard

How Banks Apply the Test

Principal and Interest Assessment

Most banks assess all loans on a principal and interest basis for stress testing purposes, even if you have interest-only loans. This is more conservative but reflects the eventual repayment requirement.

Existing Debt Inclusion

The stress test applies to all your debt, not just the new loan. Your existing home loan, any investment loans, and other debts are all assessed at the higher rate.

Income and Rental Shading

While the stress test increases your assessed expenses, banks also apply conservative treatments to income. Rental income is typically shaded by 20% to 30%, reducing the offset against the stressed repayments.

Variations Between Banks

Different banks use different stress test parameters. These differences can significantly affect your borrowing capacity:

Some banks use a 2% buffer; others use 3%
Floor rates vary from around 6.5% to 7.5%
Treatment of existing fixed-rate loans varies
Some banks offer exemptions for certain loan types

This is why working with a mortgage broker who knows multiple lenders can be valuable. The bank that says no might be applying a tighter stress test than a competitor who would approve the same application.

Running Your Own Stress Test

Before applying for a loan, run your own stress test. This helps you understand your buffer and prepare for the bank's assessment.

DIY Stress Test Checklist:

☐ Calculate your current total loan repayments
☐ Recalculate at 3% higher interest rate
☐ Check you could still cover all expenses with the higher payment
☐ Consider what would happen if a tenant left (vacancy)
☐ Factor in potential maintenance or emergency costs

If your own stress test shows you would struggle, the bank will likely reach the same conclusion. Better to know this before you make an offer on a property.

Strategies to Improve Your Position

Reduce Other Debts

Paying off credit cards, car loans, or personal loans reduces your stressed debt servicing and improves your position. Even reducing credit card limits (not just balances) helps.

Increase Income

Higher income directly improves your serviceability. This could be a pay rise, a second job, or demonstrating additional rental income from existing properties.

Choose the Right Lender

Since stress tests vary between banks, choosing a lender with favourable parameters can increase your borrowing capacity. A broker can help match you with the right lender.

Structure Loans Strategically

Longer loan terms reduce assessed repayments. While you might not want a 30-year loan, having the option can improve your stress test results. You can always pay more than the minimum.

When Stress Tests Change

Stress test parameters are not fixed forever. Banks adjust them based on:

Regulatory guidance from the Reserve Bank
Economic conditions and outlook
Competition and market pressures
Their own risk appetite and portfolio considerations

When stress tests tighten, borrowing becomes harder. When they loosen, capacity increases. Staying informed about these changes helps you time your applications.

The Bottom Line

The mortgage stress test is a reality of borrowing that you need to understand and work with. It will reduce your maximum borrowing capacity compared to what you might expect based on current rates, but it also provides a valuable safety check.

Run your own stress tests before applying, understand that different banks have different parameters, and work with a broker who can help you navigate the options. With the right approach, you can maximise your borrowing capacity while maintaining a prudent safety buffer.