If you can’t pass another bank’s test, start with the bank you already have and ask it for a better rate, because staying put doesn’t need a new test. If you’ve never missed a repayment and still feel stuck, that’s a fair way to feel, and you usually have more room than it seems.
This page is part of our guide for investors holding on through higher rates and falling values.
Why the test is so hard right now
Settled: a bank looking at a new loan has to check you could still make the repayments if your rate were 3 percentage points higher. The buffer is set by the banking regulator, which left it unchanged in May. With investment rates around 7%, you’re being tested at about 10%, and most lenders only count part of your rent when they do it. A clean repayment record doesn’t change that.
There are three things worth trying, roughly in this order.
Am I stuck with my current bank?
The first is a repricing with the bank you already have. Your loan isn’t changing, so there’s no new test. Banks tend to save their sharpest rates for new customers, and the existing ones usually get a better rate only when they ask for it. It helps to go in knowing what other lenders are charging for a loan like yours.
The second is a like-for-like refinance. Some lenders, a few big banks among them, will test a straight swap at 1 percentage point above the new rate, instead of 3, and look at how you’ve actually been repaying.
Varies: each lender sets its own conditions, but they tend to look similar. You borrow about what you owe now, with no cash out, and the new repayment is no higher than the old one. You’ll need 12 months of repayments with none missed, and usually a loan of no more than 80% of the property’s value. Interest-only loans often don’t qualify. Most of what lenders publish about this is written for home loans, so we check that a lender will do it on an investment loan before you apply.
The third is a lender outside the big banks. Some non-bank lenders use a smaller buffer, but their rates are often higher, so you could pass their test and end up paying more. I’d only suggest it where the numbers clearly work.
What the test looks like in dollars
Illustration only, with invented figures. Say you owe $600,000 with 25 years left, at 7% a year, principal and interest. That’s the rate we’ve assumed for a typical investment loan since the November rise. Your repayment is about $4,241 a month.
A new bank using the usual test checks you could manage about $5,452 a month, which is the repayment at 10%. Under a like-for-like test at 8%, that drops to about $4,631. Your budget has to show $821 a month less.
If your own bank takes 0.4 of a percentage point off instead, to the sharper 6.6% we’ve assumed, your repayment falls by about $152 a month, with no test at all.
What we’d do
- Ask your bank for a better rate, with current pricing from other lenders in hand.
- Check whether you fit a like-for-like refinance at a different lender.
- Look at how your loans are set up. A messy structure costs money whether you move or not, and it’s often fixable with the bank you have. Our loan structuring page explains what we look for.
- If none of that closes the gap, have an honest look at whether to sell or hold.
If you’d like us to go through your loans with you, book a free portfolio review.