When most people think about interest rates, they immediately think about how they affect their monthly loan repayments — and that’s true. If your home loan interest rate goes up (and it’s not fixed), your repayments will increase.
But interest rates influence far more than just your repayments. They also affect how much you can borrow, whether you can refinance, and what loan structures might work best for you.
- Why lenders assess you at a higher rate than your actual loan
Before lending you money, your broker and your lender are required by law to verify that you can afford the loan without experiencing substantial financial hardship.
To do this, they don’t just look at the current interest rate. They test whether you could afford repayments if interest rates went higher — by adding an Interest Rate Servicing Buffer (IRSB).
For example, if you want to borrow $1,000,000 at 5.5%, your actual monthly repayment would be $5,673. But with a 3% IRSB, the lender will test your capacity as though the rate was 8.5%. That means you need to be able to afford repayments of $7,683 per month.
Put differently: if you can afford $7,683 per month at 5.5%, you could potentially borrow around $1,350,000.
- Why does the buffer matter?
Having a buffer is prudent — it protects borrowers (and lenders) from the shock of future interest rate rises.
APRA (the regulator of banks, credit unions, and building societies) currently requires all authorised deposit-taking institutions (ADIs) to use a 3% buffer.
However, non-APRA lenders (sometimes called non-banks) often use a lower buffer, such as 2%.
- What does that mean for you?
If the buffer was 2% instead of 3%, you could potentially borrow around $1,100,000 — that’s 10% more than from an APRA-regulated lender, assuming the same interest rate.
Of course, if the interest rate itself is higher, your borrowing power may still be more than with an ADI, but your repayments would also cost more.
- How fixing your rate changes things
If you choose to fix your interest rate (for example, for five years), some lenders remove the buffer when assessing your borrowing capacity.
Why? Because fixing your rate reduces the risk of hardship from rising interest rates during the fixed period.
For example:
If the five-year fixed rate is 6% and no buffer is applied, you could borrow around $1,280,000.
Of course, fixing comes with trade-offs: you won’t benefit if rates fall, but you’ll be protected if they rise during that fixed term.
- The bottom line
Interest rates do more than set your repayments. They shape how much you can borrow, your refinancing options, and the loan types available to you.
As rates and lending rules change, so do these calculations.
Working with a mortgage broker can make all the difference. We help you compare lenders, explore different loan structures, understand the trade-offs of different options and find the right product for you.
