How banks decide what to lend you
Three separate tests sit between you and a mortgage, and the one people talk about is not always the one that limits the borrowing.
On this page
- Tests applied
- Three, independently
- Often binds
- The servicing test
- Stress rate
- Well above what you pay
- DTI limit
- On the bank, not on you
The servicing test, often the binding constraint
Every bank checks whether you could still make the repayments if rates were considerably higher than they are. They apply a stress rate above the advertised one, and ask whether your income covers the loan at that rate alongside your existing commitments.
This can be the tightest of the three tests, and it is the reason two people with the same deposit and the same income can get different answers: the bank's view of your living expenses feeds directly into it.
The deposit, which decides the price as much as the answer
A deposit below 20% does not necessarily mean no. It means a low-equity premium or margin, which is an ongoing cost added to your rate, and it means competing for a limited share of the bank's lending that is allowed to sit above that threshold.
Debt to income, which is a limit on the bank
The Reserve Bank's DTI restrictions are widely described as a cap on how much you can borrow. They are not. They limit how much of each bank's new lending may exceed the threshold, so a loan above it is possible but competes for a small allocation.
In practice this matters most at the margins. If your servicing is comfortable and your deposit is strong, a high DTI can still be lent against. If servicing is already tight, DTI is unlikely to be the reason you were declined.
What to do with this
Work out where you sit on all three before you talk to anyone, because it changes what you are asking for. Being near the limit on one test and comfortable on the other two is a different conversation from being near the limit on all three.
None of the three is a decision. A bank can decline a loan that passes every one of them, and an adviser can sometimes place a loan that fails one.
Why your own spending is part of the test
Banks do not take your word for living expenses. They apply a benchmark for a household of your size, compare it against what your statements actually show, and use the higher of the two. Recent unusual spending before an application is visible, and it counts against you at the stress rate rather than the real one.
Existing credit is treated harder still. An unused credit card limit is generally assessed as though it were fully drawn, so a card you never touch can reduce what you are able to borrow. Closing one you do not need can be the cheapest change available, and an easy one to overlook.