Avoiding an Affordability Shock
One of the most confusing and frustrating experiences for borrowers is this:
“I earn more than I did a few years ago. I’ve never missed a mortgage payment.
So why is the bank suddenly saying affordability is tighter?”
It feels illogical. It feels unfair. And for many people, it comes as a complete shock.
Unfortunately, bank affordability assessments aren’t static. They change over time (sometimes significantly) even if your situation hasn’t changed much at all.
In this post, our mortgage broker explains how banks assess affordability in practice, why those assessments change, when banks reassess affordability (often without people realising), and how this impacts refixing, selling, and restructuring decisions…
WHAT AFFORDABILITY MEANS TO A BANK
When a bank talks about affordability, they’re not asking:
“Can you afford your mortgage repayments today?”
They’re asking:
“Could you still afford the mortgage if conditions got worse?”
That difference is critical. Banks assess affordability using forward-looking assumptions, not your current reality.
KEY COMPONENTS OF A BANK AFFORDABILITY ASSESSMENT
While each bank has its own policy, most assessments include:
Your income (and how reliable it is)
Your living expenses (using minimum benchmarks)
Your existing debts
A test interest rate (higher than your actual rate)
Assumptions about the future, not the present
This means affordability is influenced by policy settings, not just your payslip.
TEST RATES: THE SINGLE BIGGEST DRIVER OF CHANGE
One of the most important - and least understood - concepts is the test rate.
Banks don’t assess your mortgage at the rate you’re paying, they assess it at a higher ‘stress-tested’ rate.
For example:
You might be paying 6.50%
The bank might test affordability at 8.50% or higher
When interest rates rise:
Test rates usually rise too
Borrowing capacity falls
Existing loans look ‘heavier’ under assessment
This can happen even if your actual mortgage repayment hasn’t changed yet.
WHY THINGS CAN WORSEN EVEN IF YOU EARN MORE
Affordability can tighten even when your income has increased, your job feels secure, you’ve paid down some debt and/or you’ve never missed a repayment. Why?
Because:
Test rates may have risen more than your income
Expense benchmarks may have increased
Lending rules may have tightened
The bank’s risk appetite may have changed
Affordability is relative - not absolute.
WHEN BANKS REASSESS AFFORDABILITY (OFTEN UNEXPECTEDLY)
Many people assume affordability is only assessed when you apply for a brand-new loan.
In reality, banks may reassess affordability when you increase or restructure lending, sell a property, release a security, discharge a loan or change ownership structures.
This is why people are sometimes caught off guard during what they assumed was just an ‘administrative’ process.
AFFORDABILITY AT REFIX TIME
Most straightforward refixes do not trigger a full affordability reassessment.
However, reassessment becomes more likely if:
You change your mortgage structure materially
You extend the loan term
You switch from principal and interest payments to interest-only
This is why early engagement with your bank (or a mortgage broker) matters — it gives you room to adjust if needed.
AFFORDABILITY WHEN SELLING
This is one of the biggest surprises for borrowers. When you sell a property - especially an investment property - banks may reassess your affordability after the sale, apply current lending rules and current test rates, and assess your remaining debt as if it were new!
This is particularly important if:
Loans are cross-collateralised
You hold multiple properties with one bank
Interest rates are higher than when you borrowed
Why Banks Do This
From the bank’s perspective:
The sale changes the risk profile
Securities are being released
Remaining mortgages must stand on their own
If the remaining debt no longer meets affordability criteria, the bank may require:
Additional debt repayment
Use of sale proceeds to reduce other loans
Structural changes before releasing titles
This can happen even if you planned to reinvest the proceeds elsewhere.
AGE + RETIREMENT ASSUMPTIONS
Another area that catches people off guard is age-based assumptions. As borrowers get closer to retirement, banks place more scrutiny on income sustainability, mortgage terms may be shortened and test assumptions become more conservative.
This doesn’t mean older borrowers can’t borrow… but the logic changes.
Banks may want to see evidence of income beyond active working life, clear repayment strategies, downsizing or asset-sale plans, and even investment income or superannuation projections.
Affordability becomes about exit strategy, not just cashflow.
WHY AFFORDABILITY RULES CHANGE OVER TIME
Banks don’t change affordability settings randomly. They respond to things like interest rate cycles, economic conditions, regulatory pressures, their own internal risk management and more.
This is why a mortgage that was easy to get five years ago might be harder to restructure today.
BROKER’S FINAL THOUGHT
Understanding affordability dynamics underpins why good loan structure is so important!
Weak mortgage structures work… until the bank re-runs the numbers. Strong structures anticipate future reassessments and preserve flexibility when circumstances change. Contact our mortgage broker today, and let’s talk about structuring your mortgage in a smarter, more strategic way.
YOU MIGHT ALSO LIKE:
• Fix your mortgage now, or wait?
• What the heck’s happening with interest rates?
• Paying a mortgage off faster (for realists)
Our blog is not intended to be taken as personal advice
and is for informational purposes only.
Before acting on this information, contact WealthHealth mortgage brokers
to ensure it is suitable for your circumstances.