What are servicing test rates?

When a bank looks at your mortgage application, they put it through several tests.

They don’t just see if you can afford a mortgage at today’s interest rates; they want to know you can still afford it even if interest rates go up.

That’s why they use a “Servicing Test Rate”. If you can’t afford your new loan at the test rate, your mortgage will be declined.

That’s why many investors ask: “What are the banks’ servicing test rates, right now?”

The trouble is these rates are often hard to find. They’re sometimes reported in the media, but servicing test rates change all the time.

Here at Opes, we give away as much information as possible so you can make an informed investment decision.

That’s why in this article you’ll learn what the servicing test rates are right now as well as how they impact how much you can borrow.

Here are the latest servicing test rates:

What is a servicing test rate?

Banks “stress test” your mortgage application. This is to see if you can handle a worst-case scenario.

So, even if you can afford the mortgage repayments at today’s interest rates, you may not be approved by your bank.

This is because servicing test rates are that much higher.

These test rates differ by bank and are not heavily publicised. They are currently around 9%. That is higher than the current 1-year rates.

If you take out a mortgage today, you’re likely to pay around 7.3% on the 1-year rate, but the test rate is around 1.7% higher.

Why does this matter? The higher the test rate, the less you can borrow, and vice versa.

Are servicing test rates going up or down?

It’s a bit of a mixed bag at the moment. Some banks are putting their test rates up, others are bringing them down.

ANZ recently reduced theirs from 9.1% to 8.9%. BNZ recently put theirs up.

It’s unusual to see one go up and another go down in the same week, but the differences are quite minor.

It’s hard to say what’s driving the difference; individual banks have their own internal assessments and each bank interprets market data differently.

More from Opes:

• Current mortgage interest rates in NZ (Article)
• Interest rate predictions (Article)
• How to buy property with the 'No Cash Needed Method' (Article)

How does the test rate impact how much you can borrow?

Let’s say a bank will lend you $600,000 for an investment property at a 9.1% test rate.

This is with 100% lending and 5 years interest-only.

What happens if the test rate falls to 8.9%? That’s a small 0.2% decrease, but it means the bank might now lend you $615,000. That’s an extra $15,000, which can help you buy a slightly better property.

The big changes happen when the test rates fall further.

Let’s say a bank is willing to lend you $600k for an investment property (same assumptions as above) when the test rate is 9%.

If that test rate falls to 8%, this could increase to $682k, an increase of $82,000.

So as test rates fall you can borrow more money.

What can I do to combat higher test rates?

If you’re trying to combat the higher test rates, there are a few things you can do.

#1 – Get money when you can

Bank policies change frequently.

Some investors think, “I’m going to time the market perfectly”. You can’t, but let’s pretend you can.

Having the perfect crystal ball won’t help you if the bank says “no”.

So, the one way to combat higher test rates is to get the lending when you can because the bank could change policies tomorrow and you might not be able to borrow more money.

#2 – Get rid of your bubblegum debt

Here at Opes we call credit cards and Buy Now Pay Later “bubblegum debt”.

Bubble gum tastes great when you start chewing, but it quickly loses its flavour and you want to get rid of it.

Credit cards are like that.

It’s fun at the start because you get to spend money, but it’s not fun when you have to pay them off. And unlike bubblegum, you can’t just spit it out (get rid of it).

The real trouble is that this bubblegum debt can stop you getting a mortgage (even if you’re not using it).

So, cancelling your credit cards and closing down your AfterPay account can potentially help you borrow more.

#3 – Use a good mortgage broker

Good mortgage brokers shine when it’s hard to get money from a bank.

A good mortgage adviser will look at your numbers and let you know what you need to do to get a mortgage approved.

Looking for a good mortgage adviser? You might like to try us here at Opes Mortgages.