If you’re a first home buyer, you may think banks use current interest rates to calculate how much you can borrow. But that’s not the case. Banks use a higher assessment rate to check you can still afford repayments if interest rates go up. Understanding how assessment rates work, why they matter, and how to improve your borrowing power can help you set realistic expectations and plan your finances wisely.

What is an assessment rate and why does it matter?

When you apply for a home loan, banks use an assessment rate to determine how much you can borrow. The assessment rate helps lenders ensure you can afford your home loan repayments even if interest rates rise. It protects both borrowers and lenders from financial stress.

While each lender sets their own assessment rate, they’re typically 2% – 3% higher than standard variable rates. Unlike standard interest rates however, lenders don’t usually advertise their assessment rates.

The assessment rate is important because it assumes you’ll pay more interest on your home loan. If your income doesn’t cover this extra interest – or you have too much debt - your application could be declined.

For example, if you applied for a home loan with an interest rate of 4%, the lender may use an interest rate of 7% to assess whether you can afford the repayments. Your income after expenses will need to cover your mortgage repayments at 7%.

Why do lenders use an assessment rate?

Lenders use an assessment rate to forecast the worst-case scenario and prevent borrowers taking on debt they may struggle to repay in the future. This safety buffer is an essential part of responsible lending practices that protect both borrower and lender.

Benefits of assessment rates:

• Safer borrowing: Banks lend responsibly by ensuring borrowers don’t take on more debt than they can afford.
• Financial protection: If interest rates rise to the assessment rate, you’ll already know you can still afford your repayments.
• Economic stability: Helps reduce the risk of large-scale mortgage stress if interest rates go up. 

Drawbacks of assessment rates:

• Lower borrowing power: You may not be able to borrow as much as you expected.
• Impact of falling rates: Even when the Reserve Bank lowers rates, assessment rates don’t always decrease.
• Bigger gap: Tighter lending rules have widened the gap between actual interest rates and the assessment rate, making borrower harder.

How to get around assessment rates?

While you can’t avoid assessment rates completely, there are a few things that can lessen their impact and improve your borrowing power:

• Shop around and compare lenders: Different lenders have different assessment rates, so comparing banks, or working with a mortgage broker, can help you find a lender offering more favourable rates.
• Reduce your debt: Credit cards, personal loans and car loans can lower your borrowing power. By paying down your debts and reducing credit card limits, you help improve your loan eligibility.
• Save a bigger deposit: A bigger deposit reduces the amount you need to borrow and can make it easier to meet lending criteria. It also helps you avoid paying Lenders Mortgage Insurance (LMI).
• Get help from friends or family: Applying for a home loan with a co-borrower – such as a partner or family member – can boost your borrowing power by combining incomes and financial responsibilities.
• Choose a longer loan term: Extending your loan term from 25 years to 30 years lowers your monthly repayments, which could help you meet lender’s assessment requirements. But it does mean you’ll pay more interest over time.
• Demonstrate financial stability: Stable employment history, a reliable income, and a history of good saving habits demonstrate to lenders you’re able to repay your loan.
• Consider alternative lenders: Non-bank lenders and second-tier lenders may have different assessment criteria and could be an option if traditional lenders aren’t suitable.

Understanding your borrowing power

Assessment rates play a critical role in how lenders assess home loan applications. They’re there to ensure you can afford your home loan repayments even when interest rates rise.

If you need help understanding how assessment rates impact your borrowing power, work with a mortgage broker from Mortgage Express. A mortgage broker can help you explore your options and find a solution that works best for your situation. Contact the team today.

While all care has been taken in the preparation of this publication, no warranty is given as to the accuracy of the information and no responsibility is taken by Finservice Pty Ltd (Mortgage Express) for any errors or omissions. This publication does not constitute personalised financial advice. It may not be relevant to individual circumstances. Nothing in this publication is, or should be taken as, an offer, invitation, or recommendation to buy, sell, or retain any investment in or make any deposit with any person. You should seek professional advice before taking any action in relation to the matters dealt within this publication. A Disclosure Statement is available on request and free of charge.

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