The buffer and the assessment rate

The last line of the sum is the new loan itself. Here every lender deliberately pretends the client is paying a higher rate than they will be. If rates rise, or the client's situation gets tighter, the loan should still be affordable. That pretend rate is the assessment rate.

Buffer and floor

The assessment rate is usually the higher of two numbers:

• The customer rate plus a buffer. The banking regulator (APRA) expects lenders to test at least 3 percentage points above the rate the client will actually pay.
• A floor rate that the lender sets itself, so a very sharp discount doesn't produce an unrealistically low test rate.

Lenders don't all charge the same rate, so even with the same buffer their assessment rates differ. A lender that prices the deal 0.3% sharper also tests it 0.3% lower, and that alone is worth a few percent of borrowing power.

When the buffer comes down

Some lenders allow a reduced buffer, often around 1%, when a client simply refinances an existing loan to a lower rate without borrowing more. The reasoning: the client has already been paying a higher repayment, so they have shown they can afford it. This is often the difference between a client who is “stuck” with their current lender and one who can move. Conditions are strict (usually no extra borrowing and a clean repayment history), and only some lenders offer it.

The term and interest-only

The test repayment is also worked out over a term, and lenders differ there too. An interest-only loan is usually tested as if principal-and-interest repayments start straight away, over the years left once the interest-only period ends. A 30-year loan with five years interest-only is tested over 25 years, which makes the test repayment noticeably higher.