Refinancing Serviceability: Will You Pass the Stress Test in 2026?

By Jason Given · 2026-08-16 · 7 min read

The refinancing paradox

You are making your repayments on time at 6.5%. A competitor offers 5.8% - that would save you $350 a month. You apply to switch. The new lender declines you.

Why? Because the new lender does not test you at 5.8%. They test you at 5.8% plus a 3% buffer - that is 8.8%. At that rate, your income does not cover the repayments. So they decline the application.

You are stuck paying a higher rate even though a lower rate would make you safer, not riskier. You would actually be in a better financial position after switching - lower repayments, more cash flow, less stress. But the regulatory framework does not see it that way.

This is the mortgage prison problem - and it affects hundreds of thousands of Australian borrowers right now. If you took out a loan during the low-rate period of 2020-2021 and your circumstances have changed even slightly, there is a real chance you are caught in this trap.

How the stress test works

APRA's prudential standard requires all regulated lenders to assess your serviceability at the loan rate plus a 3% buffer. This is not optional - every bank, credit union, and major non-bank lender must apply it.

If you apply for a loan at 6.0%, the lender tests whether you can afford repayments at 9.0%. They calculate the monthly repayment at 9.0% and check whether your income - after tax, after living expenses, after other debts - can cover it.

If the answer is no, the application is declined. It does not matter that you are currently making repayments at a higher rate with a different lender. It does not matter that switching would reduce your repayments. The new lender must assess you as a new borrower.

The buffer was introduced during the low-rate period to protect borrowers from future rate rises. It served its purpose when rates were at 2-3%. But in a high-rate environment, where borrowers are already being tested by reality at 6-7%, the buffer can trap people in loans they want to leave.

Why different lenders give different answers

Not all lenders calculate serviceability the same way. Two lenders can look at the same borrower and reach completely different conclusions. Here is why:

• •Living expenses. Some lenders use your actual expenses from bank statements. Others use the Household Expenditure Measure (HEM) benchmark, which is typically lower. HEM-based lenders are more likely to approve you because they assume lower expenses.
• •Income treatment. Some lenders include 100% of overtime, bonuses, and commission in their serviceability calculation. Others include only 50-80% or exclude them entirely. If a significant portion of your income is variable, this makes an enormous difference.
• •Existing debt treatment. Credit card limits reduce your borrowing capacity even if you pay them off every month. Some lenders assess the full credit limit as a potential debt. Others assess only the outstanding balance. A $20,000 credit card limit you never use could cost you $60,000+ in borrowing capacity with the wrong lender.
• •Loan term. Some lenders allow 30-year terms regardless of your age. Others restrict the term to your expected retirement age. A shorter term means higher repayments, which makes serviceability harder to pass.

The difference between a lender who uses HEM with 100% overtime versus one that uses actual expenses with 50% overtime can be $100,000 or more in borrowing capacity. Same borrower, same income, same property - completely different outcome.

This is why using a broker matters more than ever for refinancing in 2026. You need someone who knows which lender's calculator works in your favour.

How to improve your chances

If you are worried about passing the stress test, there are practical steps you can take before applying:

• 1.Reduce credit card limits. Even if you pay your card off every month, the full limit is assessed as a potential debt. Call your bank and reduce limits to the minimum you actually need before applying for a refinance.
• 2.Close unused accounts. Afterpay, Zip Pay, store cards, and unused credit cards all reduce your borrowing capacity. Close anything you do not actively need. Allow 30 days for these to update on your credit file.
• 3.Consolidate debts. If you have multiple small debts - personal loans, car finance, buy now pay later - consider paying them off before refinancing. Each separate commitment reduces your borrowing capacity.
• 4.Document all income. Overtime, bonuses, rental income, child support - make sure you have at least 6 months of evidence for every income stream. The more income you can demonstrate, the stronger your serviceability position.
• 5.Use a broker who tests across multiple lenders. Lendology assesses your file against 60+ lender policies to find the one where you pass. We do this before lodging any application, so you know your options before you commit.

The retention offer alternative

If you cannot pass serviceability with a new lender, there is still a path to a lower rate. Call your current lender and ask for a rate review. Most banks have retention teams whose entire job is to keep you from leaving.

The key advantage of a retention offer is that your current lender does not need to run a new serviceability assessment. You are already their customer, already making repayments. They can reduce your rate without treating you as a new borrower.

The reduction is typically 0.3-0.8% - not as much as switching to a new lender, but better than nothing. On a $500,000 loan, even a 0.5% reduction saves around $200 a month.

Lendology can negotiate with your current lender on your behalf if refinancing is not possible. We do this regularly for clients who are stuck - and it often gets a better result than calling the bank yourself, because we know what rates other lenders are offering and can use that as a negotiating tool.