How do you stress-test your buying budget against rate rises?

Stress-test your budget against rate rises

Stress-testing your budget means checking whether your mortgage repayments would still be manageable if interest rates rose or your financial circumstances became less favourable. It is a useful check before deciding how much you are comfortable borrowing, because the rate you start with is not necessarily the rate you will have throughout the life of the loan.

There is no single stress-test percentage that works for every household. How much financial breathing room you want depends on your income, your commitments and how much certainty suits your circumstances.

Mortgage rates can change over the life of a loan, particularly for variable-rate loans. A rate that looks manageable today may produce a very different repayment if rates rise. Interest rates aren't the only thing that can change. Income, household costs and other financial commitments can change too.

What a lender assesses, and what you assess

A lender's assessment and your own affordability check answer different questions. The difference between what a lender may lend and what fits your budget is covered in borrowing capacity vs purchase price.

You can run your own scenario using a higher interest rate to see how the repayments would affect your household budget.

Does passing the bank's assessment mean I can comfortably afford the loan?

Not necessarily. A lender's assessment determines whether the loan meets its lending and serviceability criteria. Your own affordability assessment should also consider your household spending, savings goals, other commitments and the financial buffer you want to retain.

What should you stress-test?

Interest rates are the obvious starting point, but they are only one variable.

• Interest rates: what happens to the repayment if your rate rises.
• Income: what if one income falls temporarily, or overtime, bonuses or other variable income disappears.
• Living costs: childcare, transport, insurance and other household costs rising.
• Unexpected expenses: whether you could handle a major repair or medical expense without immediately relying on more debt.
• Savings: whether you could still maintain your intended savings or emergency buffer.

Modelling a higher rate

Try modelling your repayments at a higher interest rate than the one you're currently considering. You can test several scenarios to see where the repayment starts to put meaningful pressure on your household budget.

Illustrative monthly repayments at different interest rates

These examples show how repayments can change as the interest rate changes. They are illustrative only; your actual repayment will depend on your loan amount, rate, term and loan structure.

Assumptions: principal and interest repayments over a 30-year term, calculated monthly. The rates shown are illustrative, not recommended stress-test rates. For figures based on your own loan, and for current rate information, use Moneysmart's mortgage calculator.

What the higher repayment would actually mean

Imagine your mortgage repayment is $4,000 a month today. If a higher interest rate pushed that repayment to $4,700, the important question isn't simply whether you technically could make the $4,700 payment. Ask what would have to change elsewhere in your household budget to make room for the extra $700. Would you reduce savings? Cut discretionary spending? Use your emergency fund? Or could you absorb it without materially changing how you live?

If the higher repayment would mean cutting back heavily on essentials, savings or normal spending, that is useful information about how much financial room the loan would leave you.

If the higher repayment would put more pressure on your budget than you are comfortable with, that may be a reason to reconsider the loan amount, property price, loan structure or timing. There are several levers here, and which one makes sense depends on your circumstances.

How to stress-test your budget

1. Work out your expected repayment. Use the loan amount, interest rate and term you're actually considering.
2. Model a higher rate. Run several, so you can see how sensitive the repayment is to a change in rate.
3. Add your other housing costs. Insurance, council rates, and strata or body corporate fees where applicable.
4. Look at the rest of your household budget. Existing debt, childcare, transport, utilities, regular spending and savings.
5. Test a less comfortable scenario. Rates rise, income falls, or household costs increase.
6. Decide what financial breathing room you want. Consider how much margin you would want to keep between your repayments and your income.

The purpose isn't to hit a particular percentage. It is to understand how much room the purchase leaves you.

How this connects to the purchase price

The sequence runs from property price, to loan amount, to repayment, to household budget. A higher property price generally means a larger loan if the deposit remains the same. Stress-testing the repayment therefore helps you understand whether the purchase price still fits your household budget under less favourable conditions.

Where this fits with conveyancing

The point of a stress test isn't to predict where interest rates will go. It's to understand how much room your budget has if things don't go exactly as planned. A mortgage that works only at today's repayment isn't necessarily a mortgage that feels comfortable over the long term. Before you decide how much to spend on a property, make sure you understand what the loan would look like when the numbers aren't quite as favourable.

Lending questions belong with your lender or broker, or a qualified financial professional. Where we come in is at contract stage: signing a contract of sale commits you to a purchase price, so it's worth being confident about your overall position before you get there. We review the contract before you sign, and handle the conveyancing once you do.