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

Many Australians who apply for a home loan hit the same wall: the lender comes back with a borrowing capacity figure that is much lower than they expected. The main reason is the APRA serviceability buffer, a cushion of at least 3 percentage points that lenders must add to 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's prudential standard APS 220, as its practice guide APG 223 explains, 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. APRA confirmed on 28 May 2026 that the buffer will remain at 3 points. The buffer is the floor, not the ceiling: lenders can add their own floor rates, and Macquarie's credit guidelines (version 14.1, updated 10 September 2026) set a minimum assessment rate of 5.30%. The average rate on new owner-occupier variable loans was 6.2% in July 2026 (RBA table F6), so a typical buffer-tested assessment rate is about 9.2%. That is the rate the lender uses to decide what you can borrow. The RBA has since raised the cash rate by 0.25 points to 4.60%, effective 30 September 2026, so where lenders pass that on, test rates are higher again.

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

Take a couple earning $130,000 combined ($65,000 each), with no kids, no existing debt, declared living expenses below the HEM benchmark 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 (6.2%): a $720,000 30-year P&I loan costs about $4,410 a month. Their take-home pay after 2026-27 income tax and the Medicare levy is about $8,951 a month. After living expenses at our HEM estimate for a couple on $130,000 ($2,800 to $3,540 a month), they have $5,411 to $6,151 left. At the actual rate, the loan fits comfortably.

At the buffer-tested rate (9.2%): the same $720,000 loan is assessed at about $5,897 a month. Our model gives them a maximum of about $660,000 to $750,000, depending on where the lender's expense figure falls in our HEM range. At the conservative end they are about $60,000 short of the target, so to buy the $850,000 property they would need more deposit, more income, a lender whose expense figure sits lower, or a structurally different loan.

The numbers above come from our serviceability model, not a lender quote: capital city, two equal incomes, no other debts, stamp duty and other buying costs ignored. HEM figures are a Your Finance Guide estimate from ABS Household Expenditure Survey 2015-16 data, re-priced to June quarter 2026 with the ABS CPI, not the licensed Melbourne Institute table. Actual borrowing capacity varies by lender, employment type, dependants, debts, and chosen loan product. But the pattern holds: 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. Run your own numbers in the borrowing power calculator.

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 sound through downturns, not to maximise borrower access in the current rate environment.

APRA lifted the buffer from 2.5 to 3 percentage points in October 2021. Rates then rose further than either buffer allowed for. A loan written at the October 2021 average rate on new owner-occupier variable loans, 2.6% (RBA table F6), was tested at 5.1% with a 2.5 point buffer, or 5.6% with 3 points, before any floor rate a lender applied. By late 2023 the average rate on all outstanding variable owner-occupier loans had reached 6.4%. The buffer did not cover the whole rise, but the extra half point narrowed the gap.

What lenders actually count as expenses

Three categories matter and most borrowers underestimate at least one:

1. Household Expenditure Measure (HEM): the Melbourne Institute's benchmark of modest spending on basics, by household type, income and location. Lenders generally use the higher of your declared expenses and HEM. Our estimate for a couple on $130,000 with no children is $2,800 to $3,540 a month, and for a couple on $250,000 with two children $4,590 to $5,730. HEM figures are a Your Finance Guide estimate from ABS Household Expenditure Survey 2015-16 data, re-priced to June quarter 2026 with the ABS CPI, not the licensed Melbourne Institute table. Most households spend more than HEM: ASIC's RG 209 says "the majority of households would spend more than the benchmark figure". HEM explained covers what sits inside and outside it, and the HEM calculator gives a range for your household.
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 still counts as $600 to $760 a month: 3% of the limit in APRA's APG 223 example, 3.8% in Macquarie's credit guidelines.
3. HECS-HELP and study loans: compulsory repayments come out of your take-home pay and lenders generally count them. They depend on income, not the balance: for 2026-27 the ATO sets them at 15c for each dollar of repayment income over $69,528, so a $90,000 salary means about $3,071 a year. ASIC's RG 209.69 lets a lender leave a HELP debt out in some cases, depending on how much is left and the loan term.

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. For most applicants with unused cards, the most direct action. In our model, closing a $25,000 limit lifts the $130,000 couple's estimate by about $91,000 at 3% of the limit, or $116,000 at 3.8%. Close it, keep the confirmation letter, then apply.
2. Audit your declared expenses against HEM. If your real spending is below HEM for your household, lenders generally use HEM anyway. If it is above, the higher figure is yours, so check whether any of it is one-off (new baby, recent move) and say so. CommBank asks for the last three months of statements unless your salary is paid into a CommBank account, and Macquarie asks for three months when declared general living expenses are below HEM (both checked 8 October 2026).
3. Switch lender categories. Banks must apply at least the 3 point buffer. Non-bank lenders are not authorised deposit-taking institutions and set their own serviceability policy, and lenders differ on how they treat self-employed income, commissions, bonuses and 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 a letter to banks on 9 June 2023, APRA acknowledged that some borrowers refinancing with another lender may no longer meet standard loan criteria, and that some banks had changed their exceptions processes to support them. The letter does not lower the buffer. What it says:

• Borrowers may fall outside standard criteria because of higher interest rates, cost of living pressures, less equity in the property or changed personal circumstances
• "Like-for-like" refinancing describes moving between lenders without increasing total debt
• Banks can consider additional indicators of repayment capacity, such as "past repayment behaviour"
• Exceptions must be "prudent and limited"; serviceability exceptions have historically been 2 to 3 per cent of banks' housing lending

Not every lender offers a refinance exception, and each sets its own criteria. 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 October 2026

With the average rate on new owner-occupier variable loans at 6.2% in July 2026 (RBA table F6), the buffer-tested assessment rate sits around 9.2%. In January 2022 that average was 2.5%, so the test rate was about 5.5%. Holding today's income, tax and our HEM estimate constant, the $130,000 couple's estimate would be $952,000 to $1,083,000 at the January 2022 test rate, against $660,000 to $750,000 at today's. The RBA has since raised the cash rate by 0.25 points to 4.60%, effective 30 September 2026, so where lenders pass that on, test rates are higher again. That difference comes from rates alone. The maths is blunt, there is no negotiating the buffer itself, and APRA confirmed on 28 May 2026 that it stays at 3 percentage points.