The mortgage stress test, plain English: why your borrowing power is 20-25% lower than the maths says

Almost every Australian who applies for a home loan in 2026 hits the same wall: the lender comes back with a borrowing capacity figure that is much lower than they expected. The reason is the APRA serviceability buffer, a 3 percentage-point cushion that lenders must apply on top of the actual rate when assessing whether you can afford the loan. This guide explains how it works, why it exists, and what you can do about it.

The rule, in one paragraph

Under APRA Prudential Practice Guide 223 (APG 223), every authorised deposit-taking institution must assess whether a new mortgage borrower can afford the loan at an interest rate equal to the actual loan rate plus a buffer of at least 3 percentage points. The buffer is the floor, not the ceiling; some lenders apply more. As at May 2026, with the cash rate at 4.35 per cent and major-bank owner-occupier variable rates around 5.99-6.20 per cent, the buffer-tested assessment rate is around 8.99-9.20 per cent. That is the rate the lender uses to decide what you can borrow.

Worked example: $130,000 couple, looking at $850,000

Take a couple earning $130,000 combined, with no kids, modest living expenses, no existing debt and a $130,000 deposit. They are looking at an $850,000 property in suburban Melbourne, which means a target loan of about $720,000.

At the actual rate (6.05%): a $720,000 30-year P&I loan costs about $4,335 a month. Their net household income after tax is roughly $8,300 a month. After HEM living expenses of around $4,400 for a couple, that leaves $3,900 of serviceable surplus. $4,335 > $3,900, so even on the actual rate, this is tight.

At the buffer-tested rate (9.05%): the same $720,000 loan costs about $5,810 a month. There is no realistic surplus to cover that. The lender approves them for around $560,000-$580,000, well short of the target. To buy the $850,000 property, the couple needs either more deposit (an extra $140,000), more income, less HEM-modelled expense, or a structurally different loan.

The numbers above are illustrative, not a quote. Actual borrowing capacity varies by lender, employment type, dependants, debts, and chosen loan product. But the pattern is the pattern: the buffer is what makes the gap between "the loan I can afford at the actual rate" and "the loan the lender will approve" large.

Why APRA insists on it

The serviceability buffer exists because mortgages are long, rates move, and households make their largest financial decision under conditions that will not hold for 30 years. APRA\'s job is to keep the banking system solvent through downturns, not to maximise borrower access in the current rate environment.

The 3 per cent buffer was lifted from 2.5 per cent in November 2021 specifically because household debt-to-income ratios were rising and APRA wanted more headroom against a future rate shock. That decision aged well: the cash rate moved from 0.10 per cent to 4.10 per cent across 2022-2025. A borrower assessed at 2.5 per cent buffer in October 2021 (when the cash rate was effectively zero) would have been tested at a 4.5 per cent rate. Borrowers assessed at the lifted 3 per cent buffer from late 2021 onward were tested at 5.5 per cent or more, which much better matched the rates they later faced.

What lenders actually count as expenses

Three categories matter and most borrowers underestimate at least one:

1. Household Expenditure Measure (HEM): a benchmark published by the Melbourne Institute that estimates typical household spending by income tier and household composition. Lenders use the higher of your declared expenses or HEM. For a couple on $130,000, HEM might be around $4,400/month; for a couple on $250,000 with two kids, more like $7,000/month. If your declared expenses are below HEM for your profile, expect the lender to use HEM.
2. Existing credit commitments: credit card limits (not balances), personal loans, car loans, BNPL accounts, store cards. Limits matter, not actual usage. A $20,000 credit card limit you never touch is still treated as $20,000 of potential debt with assumed repayments around $600/month.
3. HECS-HELP and study loans: compulsory repayments are deducted from serviceable income. A $40,000 HECS balance on a $90,000 salary triggers around $5,400/year of compulsory repayment, which is treated as a fixed cost. Lenders cannot ignore HECS even though it is interest-free; the repayment obligation is real.

Four ways to lift your assessed number

You cannot persuade the lender to lower the buffer. You can change the inputs the lender plugs into the buffered calculation.

1. Close unused credit cards. The biggest single high-impact action for most applicants. A $25,000 credit card limit closed before application typically lifts borrowing capacity by $100,000-$150,000. Yes, really. Close it, get the closure letter, wait for it to drop off your credit file (usually 30-60 days), then apply.
2. Audit your declared expenses against HEM. If your real spending is meaningfully below HEM for your household profile, that is fine; lenders use HEM as the floor anyway. If your real spending is meaningfully above HEM, you have leverage to demonstrate it is a one-off (new baby, recent move) rather than ongoing. Bank statements over 3 months are the source document.
3. Switch lender categories. Major banks apply the 3 per cent buffer and conservative HEM assumptions. Some non-bank and second-tier lenders use looser methodology, particularly for self-employed applicants whose income is being averaged or for borrowers with non-standard income streams (commissions, bonuses, rental income). A broker can flag which lenders fit your profile.
4. Use a guarantor or shared-equity structure. A family guarantee can change the LVR position. The federal Help to Buy scheme reduces the loan amount itself by having the Commonwealth contribute up to 40 per cent of the price (on a new home), which proportionally reduces the buffered repayment the lender is testing. We cover both in dedicated guides.

The refinancing exception (and its limits)

In 2024 APRA acknowledged that the full 3 per cent buffer was trapping otherwise-creditworthy borrowers on uncompetitive rates, because they could not service a switch even though their actual repayments would fall. The "modified serviceability assessment" framework allows lenders, at their discretion, to apply a lower buffer (typically 1 per cent) when:

• The borrower is refinancing a like-for-like loan amount (no cash-out)
• The new loan term is no longer than the remaining term on the existing loan
• The borrower has a strong repayment history (typically 12+ months with no missed payments)
• The new loan rate is materially lower than the existing rate

Not every lender opts into this framework, and the criteria are specific. If you are on a back-book variable rate well above current front-book rates, this is worth asking a broker about, but do not expect it to apply to every refinance.

What this means in May 2026

With the cash rate at 4.35 per cent and major-bank owner-occupier variable rates around 5.99-6.20 per cent, the buffer-tested assessment rate sits at 8.99-9.20 per cent. That is the highest serviceability hurdle Australian borrowers have faced since the cycle began. A household that comfortably qualified for $800,000 in early 2022 (when the cash rate was 0.10 per cent and the buffer-tested rate around 5.5 per cent) would be assessed for closer to $550,000 today on the same income. The maths is brutal but it is the rule, and there is no negotiating the buffer itself.