How banks actually assess you when you refinance

By David Oastler, Chartered Accountant, former group CFO · Principal Broker · Last updated July 2026

The short version, if you’re pressed for time

• A lender first works out what’s left from your household income after living expenses, debts and other commitments. For living expenses it generally uses the higher of what you declare or a minimum benchmark for a household like yours.
• Whatever survives that subtraction is then tested against the mortgage repayment, but not at the rate you’d actually pay.
• APRA’s guidance expects the banks it regulates to assess you at a rate at least three percentage points above your actual rate. A loan priced at 6.40% is generally assessed as though it were 9.40%.
• A higher assessment rate means a higher assessed repayment, so the same income supports a smaller loan. That is what people mean when they say the buffer reduces borrowing capacity.
• It’s also why people who make every repayment, every month, can be told they “can’t afford” a cheaper loan. A “no” under that test is a statement about assessed capacity, not about your repayment conduct.
• Not every lender runs the same test. APRA’s buffer binds the deposit-taking institutions it regulates; assessment policy differs beyond that, and for borrowers with a clean repayment record refinancing like-for-like, some lenders can apply a substantially reduced assessment margin. Eligibility is strict and policies change, so treat this as context, not a promise.
• The quickest way to see whether your situation may be worth a proper look is the free 60-second check further down this page.

“We pay it every month. How can we not afford a cheaper one?”

If you’ve had this conversation at your own kitchen table, you’re not alone. It’s one of the most common conversations my team and I have.

You’re still making the mortgage payments, but everything else is getting harder. The fixed rate ended, the repayments jumped, and your income hasn’t moved the way rates did. Maybe you asked your bank for something better and got a polite no. Maybe you tried to refinance elsewhere and were knocked back. Maybe you only just qualified last time, so you assumed there’d be no chance now, and never even tried.

And underneath it sits a question that genuinely doesn’t add up: you have been making these repayments the whole time. Every month, without fail, you prove you can afford your loan. Yet when you ask to move to a cheaper one, the answer comes back: “you don’t qualify.”

That’s not a personal failing, and it’s not the bank being difficult for sport. It’s how the assessment works, and once you understand it, the “no” starts to make a different kind of sense.

Step one

First, they work out what’s actually left over

Before a lender looks at your mortgage at all, it works out a single number: what remains from your household income once everything else is paid for.

Income, minus your living expenses, minus your existing debts and financial commitments: credit cards, car finance, personal loans, the lot. Whatever survives that subtraction is the money the lender treats as available to service a mortgage. Everything that follows on this page is a test applied to that one number.

And there’s a wrinkle in the middle of it that catches almost everyone by surprise.

You’ll be asked to declare your living expenses. But the lender doesn’t simply take your word for it. Most lenders also measure your household against a benchmark of what a household like yours typically spends, the Household Expenditure Measure, usually shortened to HEM. It’s built from national survey data on what Australian households actually spend, and it moves with your circumstances: how many adults are in the household, how many children, and how old those children are.

The lender then generally uses the higher of the two figures: your declared expenses, or the benchmark.

That sentence does a great deal of work. If you run a genuinely tight household and your real spending sits below the benchmark for a family your size, the assessment will often set your actual discipline aside and use the benchmark instead. You can’t economise your way past it. And because the benchmark climbs with the number and age of your children, the family in exactly the season of life where money is tightest is also the family whose assessed expenses are pushed highest.

Step two: the buffer, explained

Then they test it against a rate you’ll never pay

Here’s the part almost nobody explains.

Once the lender knows what’s left over, you’d expect the next question to be: “Can this household afford the repayments at the rate we’d actually charge them?” That isn’t the question it asks.

Instead it adds a safety buffer on top. APRA, the Australian Prudential Regulation Authority, the body that supervises Australia’s banks, publishes guidance expecting the lenders it regulates to assess new borrowing at a rate at least three percentage points above the rate you’d actually be charged. It is guidance rather than black-letter law, but every mainstream bank works to it.

So a loan priced at 6.40% is generally assessed as though the rate were 9.40%. The lender calculates what the repayments would be at that higher, hypothetical rate, and tests whether the surplus from step one could still cover them.

Picture a couple who make their repayment every single month. The assessment doesn’t ask, “can they keep doing what they’re already doing?” It asks, “could they still do it if their rate jumped by three percentage points tomorrow?”

If the answer to that second question is no, the application fails. Not because they can’t afford the repayments they’re actually making. Because they can’t afford a version of the loan they’d never actually be paying.

And because a higher assessment rate produces a higher assessed repayment, the same income stretches to a smaller loan. That is what people mean when they say the buffer reduces borrowing capacity: nothing about your income has changed, but the size of the loan it will support has.

Why does the buffer exist? (It’s not a conspiracy)

Straight answer: the buffer is there to protect borrowers, and in principle it’s sensible.

Rates move. Incomes change. A lender that approved loans people could only just afford on today’s rate would be setting families up to fail the moment conditions shifted. The buffer forces the question: could this household survive a meaningful rate rise? As a former CFO, I’d call that prudent lending. It’s the kind of stress-testing any good finance person runs before signing off on a commitment.

So no, the buffer isn’t the villain of this story. I’m not going to tell you the system is rigged, because it isn’t.

It’s worth knowing precisely who that guidance binds, because it matters later on this page. APRA supervises authorised deposit-taking institutions: the banks, credit unions and building societies that hold your savings. Lenders that don’t take deposits sit outside APRA’s remit and set their own assessment policy. So the three-point buffer is genuinely standard across the banks, and genuinely not universal across the whole market.

But sensible rules can still produce strange outcomes at the edges. And the buffer has one side effect that catches a lot of good borrowers: the very people it was designed to protect.

The side effect: your track record doesn’t get a vote

The standard test is a hypothetical about the future. It is not a review of your past.

Which means the strongest evidence you have (months and years of repayments made in full, on time, through the exact rate rises the buffer is worried about) carries almost no weight in the calculation. You can pass the real-world test every month and still fail the hypothetical one.

Now add how the last few years actually played out. Many households qualified when rates were at record lows, tested with the buffer on top of a low rate. Then rates rose, repayments jumped, and incomes didn’t keep pace. Today, the same household asking to refinance is tested at the buffer on top of current rates: a test rate higher than anything they’ve ever been asked to prove, for a loan that would cost them less than the one they’re already paying.

Same people. Same house. Same discipline. Different test.

Worth sitting with for a moment: the rate rises the buffer was designed to protect you against are the very rate rises you have already absorbed, in real life, out of your own income. You didn’t model it. You lived it. And the test still doesn’t count it.

The part fewer people know

The test isn’t the same everywhere

Most people assume every lender runs the same maths. They don’t.

Some of the reason is structural, and we’ve already touched on it. The three-point buffer is APRA guidance, and APRA regulates deposit-taking institutions. A lender that isn’t one of those isn’t bound by that guidance and sets its own assessment margin. The rest of the reason is ordinary commercial policy: lenders make their own decisions about how they read income and expenses, and those decisions differ.

Assessment policy genuinely differs between lenders: the buffer applied, how income is read (especially if you’re self-employed or your income doesn’t arrive as a tidy payslip), and what weight your repayment history carries. As one real example we’ve seen (and outcomes vary), the same file can support meaningfully different borrowing amounts at different lenders. Same person, same documents. Different maths, different answer.

And for one situation in particular, the difference can be significant. For borrowers with a clean recent repayment record who are refinancing like-for-like (same loan, no extra borrowing, moving to a lower rate and a lower repayment), some lenders can apply a substantially reduced assessment margin instead of the standard buffer. The logic is hard to argue with: you’re already making higher repayments than the ones you’re applying for, and you’ve proven it month after month.

Before you read that as a promise, it isn’t one. Eligibility criteria are strict: typically clean recent conduct, adequate equity, and a genuine like-for-like switch. Policies change, sometimes without much notice. And whether any of it fits your situation can only be answered by looking at your situation.

But it does mean this much: a “no” under the standard test is not automatically a “no” from every lender under every policy. Assuming it is (and plenty of people quietly do) is an expensive assumption to leave untested. For the fuller map of why that is, choosing the right lender covers how policy actually differs across the market.

Illustration only. Eligibility criteria apply and vary.

One more limit worth knowing about

There’s a second constraint sitting alongside the buffer, and it’s newer.

From 1 February 2026, APRA caps how much high debt-to-income lending the institutions it regulates can write: no more than 20% of new owner-occupied loans, and no more than 20% of new investment loans, can go to borrowers whose total debt is six times their income or more.

It isn’t a ban, and it isn’t a rule about you personally. It’s a limit on the composition of the lender’s book. The practical effect is that a bank approaching its own limit becomes more selective at that end of its lending. If your total debt sits at or near six times your income, it’s worth knowing this exists before you conclude that a decline was purely about your file.

Why you can’t just lodge these and hope

If reduced-assessment pathways exist, why doesn’t every application simply find its way to one?

Because applications like these are hand-built. Lodged through standard channels, they can fall over, not because the borrower doesn’t fit, but because nobody matched the file to the lender whose criteria it fits, or presented it the way that lender’s assessor needs to see it.

These applications aren’t lodged and hoped for. They’re engineered: matched to the lender whose policy fits, and built so the file’s strengths are impossible to miss. That’s exactly the work my team and I do by hand, on every application. For 25+ years I’ve been a finance broker, and for most of that time I was also working as a Chartered Accountant and group CFO, reading financial positions, structuring them properly, and dealing with banks from the other side of the table.

That’s not a claim that expertise changes your numbers. It can’t, and nobody honest will tell you otherwise. What it changes is whether the lender whose policy actually fits your numbers ever gets to see them properly.

So what do you do with this?

Everything on this page is general information: how assessment works in principle, not what’s right for you. Your numbers, your equity, your income story and your loan are your own, and every situation is different. That’s not a disclaimer for the sake of it; it’s the actual reason the next step is a conversation, not an application.

If your repayments are up to date and this page has you wondering, four things are worth knowing about your own position. And if you want the fuller picture of how a refinance actually unfolds, start to finish, our refinancing guide walks through it.

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Questions people actually ask

The information on this page is general in nature and doesn’t take into account your personal objectives, financial situation or needs. It isn’t a recommendation about any particular credit product or lender. Lending criteria, assessment policies, terms and conditions vary between lenders and change over time; eligibility is always assessed on individual circumstances.

Keep reading

• There are five kinds of lender in Australia. Most people only ever meet one.
• There are only three good reasons to refinance.