Can you really afford that home loan?

Can you really afford that home loan?

In New Zealand, banks conduct Stress Testing on all home loan applications as a risk management practice to ensure that borrowers can withstand potential financial pressures. The results of this test can impact your ability to qualify for a home loan, and at the very least, on the amount you might be asking for.

This process involves testing a home loans affordability at a higher interest rate than what is typically being advertised, for example you may be able to fix your home loan in for 6.5%, however the bank will assess your loan at 8.5%. Why?

This provides the bank, and you, as their client, with room to move in a "worst case scenario" when interest rates go up, which of course they do from time to time as much as they also go down. Primarily your lender wants to know that you will be able to meet your required monthly payments over the term of your loan (this is called your serviceability).

The primary objectives of Stress Testing home loan applications include:

Ensuring Borrower Affordability:
By evaluating how borrowers would cope with higher interest rates, banks can determine if the loan is affordable in the long term, not just at the time of application. 

Mitigating Risk: Stress
Testing helps banks identify potential risks in their lending portfolios. By understanding how many borrowers might struggle to repay their loans under stress scenarios, banks can make more informed lending decisions.   

Regulatory Compliance:
New Zealand's financial regulatory framework encourages banks to adopt prudent lending practices. Stress Testing is part of this framework, ensuring that banks maintain responsible lending standards and protect both themselves and their customers. 

Promoting Financial Stability:
By ensuring that borrowers are not over-leveraged, Stress Testing contributes to the overall stability of the financial system. It helps prevent situations where a significant number of borrowers default on their loans, which could have broader economic implications. 

Overall, Stress Testing is a proactive measure that helps banks manage risk and promote responsible lending, ultimately benefiting both the bank and you, their customer. 

Why talking with a mortgage broker BEFORE the bank helps you

Not all banks test equally. Each bank uses their own formula to determine their Stress Test rate figure, and each bank has other criteria they needs satisfying before they will approve a loan. A great broker knows this and understands all the other criteria.

Its the job of your broker (Financial Adviser) to take you through the options from multiple lenders so you can compare figures and make a more informed decision on who you then choose to put your lending with on your homeownership journey.

Struggling to meet your mortgage payments today?

Don't ignore that feeling in the pit of your stomach.

Please reach out to us earlier rather than later. We'll take you through your options in a judgment-free space, and together we'll determine what you best mortgage move should be for your personal circumstances.

Remember, our services are free, and we work for you, not the banks!