When it comes to test rates for your mortgage in New Zealand, understanding what they are and how they impact your borrowing power is essential. Whether you’re a first home buyer or looking to refinance, test rates – also known as stress or servicing rates – play a major role in determining how much you can borrow.
What Are Test Rates for Mortgages in New Zealand?
Test rates for mortgages in New Zealand are interest rates set by lenders to assess your ability to repay a loan. Whilst market interest rates may fluctuate, test rates are higher and designed to test how you’d cope financially if market rates rise significantly. This “stress test” provides banks and lenders with an extra measure of reassurance that borrowers can continue to meet their repayment obligations if market interest rates do rise.
Why Do Lenders Use Test Rates?
Lenders use test rates for mortgages in New Zealand as part of their risk assessment strategy. By applying a higher-than-current interest rate, they ensure that you can afford repayments even if interest rates go up in the future. This helps protect both the borrower and the lender from financial stress and potential default if economic and financial conditions change.
For Example:
If the market rates 5% a lender may apply a test rate of 7% to your mortgage application. This way, they’re gauging your ability to handle higher repayments than what you might initially expect to pay.
Are Test Rates The Same Across All Lenders?
No, test rates vary by lender, and some may have slightly more lenient policies. Working with your Mortgage Supply Co adviser can help you identify lenders who may offer more flexibility in their test rate criteria.
How Test Rates Affect Your Mortgage Application
Using test rates for mortgages in New Zealand means that your borrowing capacity could be lower than you’d expect based on the current market rates. Even if you’re confident in your ability to manage repayments at today’s rates, the lender’s test rate may limit the total amount you can borrow. This assessment considers not only your current income and expenses but also your financial resilience in a higher-rate environment.
This can be frustrating for borrowers who feel financially capable but are constrained by __________. However, test rates are an essential part of a responsible lending framework and ensures borrowers aren’t taking on more debt then they can manage long-term.
Tips for Navigating Test Rates in New Zealand
If you’re looking to maximise your borrowing power, here are a few strategies that may help:
- Reduce Existing Debt: Lenders consider all your current financial obligations, so paying down existing debt can help improve your borrowing potential.
- Save for a Larger Deposit: The more you can contribute upfront, the less you’ll need to borrow, which could help you pass test rate requirements.
- Increase Your Income: Higher income can improve your ability to meet the repayment demands of a higher test rate.
- Call Your Mortgage Supply Co Mortgage Adviser: Every situation is different, our job is to find the right solution to suit your circumstances, needs and goals.
Whilst test rates might feel like an obstacle, they’re designed to ensure financial stability for both borrowers and lenders. By understanding how test rates work and working with your Mortgage Supply Co Adviser, you can improve your chances of securing a mortgage that suits your needs.
