Test rate is the risk management model that lenders use to ensure that customers are being able to afford the loan repayment if the interest rates were to increase. Test rate is constantly reviewed by lenders, depending upon the market situation. It can be favorable when the market has a downward movement in the interest rate. Currently, New Zealand is trending on the opposite direction.

How does it affect you? 

Imagine, you are seeking or looking at applying for your first home loan, the loan amount is tested over a specific loan term i.e., 30 years or lower. The test rate in this case would be higher than the fixed term rates or floating rates when lenders assess your applications. 

Over the last couple of years, the upward movement in the test rates have caused the overall borrowing to reduce.

If you have been in the process of purchasing a property, you may have been thinking, why am I unable to borrow what I initially could afford.

Reality, the test rates chews up your monthly surplus. 

For example, if you are borrowing $750k, and your monthly surplus also known as UMI (Uncommitted Monthly Income) is $150. The slightest increase in the test rate would negatively impact this surplus of $150, which could potentially change your position from an approval to potentially one of the following:

• deferring your application
• injecting more deposit and/or
• reducing your total loan amount.

Again, every lender has different test rates, so you always have options available in the market.

Why should you worry about test rate? 

• If you are purchasing soon and putting yourself on the back foot, this could mean by the time you have everything ready to submit your loan application, the market may change, and the test rate could potentially rise.
• Don’t be in the position that you have to complete the residential investment property purchase by injecting your hard-earned cash to cover the difference. You may have the savings aside for your other financial objectives.
• Remember, a pre-approval can be valid up to 90 days. If you have not been able to complete the purchase within the pre-approved period, and still seeking to purchase in the next few months, in this case, you would need to re-apply for an extension. If there are upward movement in the interest rate (could occur off the movement in the wholesale rates and OCR), potentially the test rate would increase, leading to proposed level of borrowing to reduce despite your current financial situation being unchanged.

In summary, if you are looking at acquiring a residential property, when the market has lot of supply and may benefit from a good purchase price.

At the end of the day, once the lender accepts your application and you get a pre-approval, you have 90 days to look for the property. 

During this time, if the test rate change, your pre-approval is not impacted. However, if you do not meet the loan conditions or find your desired property during this time period, then the lender will rollover over at the current test rate. 

Make a plan • Stick to the plan • Execute the plan

Disclaimer: The article should not replace or used as a substitute for personalised financial advice. It is recommended that you seek independent financial advice based upon your needs, goals, and situation. SK Financial Group and their employees cannot be held accountable to the information in the article. Indicative interest rates have been used from external websites; we are not responsible for accuracy of data. Please check our disclosure statement on our website for full information, alternatively you can contact us for full disclosure, terms, and conditions.