How Lower Bank Test Rates Can Boost Your Borrowing Power.

New Zealand mortgage test rates are experiencing their most significant drop in recent years, unlocking additional borrowing power specifically benefiting first home buyers and existing homeowners alike.

In this article we’ll take a look at how the increased borrowing capacity significantly impacts potential homebuyers, creating new opportunities in a previously challenging market. 

Understanding Mortgage Test Rates 

Before diving into recent changes, it’s important to understand what a mortgage test rate actually is. 

In New Zealand’s banking system, a test rate (also called a serviceability rate or assessment rate) is a higher interest rate that banks use to assess whether you can afford a mortgage – not the actual rate you’ll pay.

When you apply for a home loan, banks don’t just check if you can afford repayments at today’s interest rates. 

Instead, they “stress test” your finances by calculating repayments at a significantly higher rate (typically 2% - 2.50% above current rates). This buffer ensures you could still make repayments if interest rates increase substantially during your loan term.

For example, if mortgage rates are around 5.5%, a bank might assess your application using a test rate of 7.5% or higher. This means your income needs to comfortably cover repayments at this elevated rate, even though your actual repayments will initially be much lower.

Test rates are a key measure required by the Reserve Bank of New Zealand to:

• Protect borrowers from financial stress if interest rates rise

• Ensure responsible lending practices

• Maintain stability in the financial system

• Reduce the risk of mortgage defaults during economic downturns

The recent reduction in test rates doesn’t mean banks are becoming less cautious – rather, it reflects changing economic conditions and the Reserve Bank’s confidence that inflation pressures are moderating, allowing for a more balanced approach to lending assessments.

Banks Slash Test Rates Following OCR Cuts 

The Reserve Bank of New Zealand's recent move in April 2025 to cut the Official Cash Rate (OCR) by 25 basis points to 3.5% has prompted major banks to swiftly reduce their mortgage serviceability test rates.

Most notably, SBS Bank has established itself as the leader with the lowest test rate, dropping to 6.75% from 7.00% effective April 14 2025. 

Other major banks have followed suit:

- Westpac reduced its test rate from 7.25% to 7.00% 

- ASB lowered its rate from 7.30% to 7.10% 

- ANZ, the country's largest home lender, cut its rate to 7.10% from 7.25% on April 2 

- Kiwibank maintained its competitive position at 7.00% 

- BNZ remains at 7.5%, currently the highest among major lenders 

These adjustments reflect an aggressive response to the RBNZ's monetary policy shift, with the central bank noting that "the preceding cuts to the OCR have yet to have their full effect on the economy”.

Borrowers Can Now Gain Additional Lending Power 

The declining test rates across the banking sector have translated into substantial increases in borrowing capacity for homebuyers. Even a slight reduction in test rates can translate to tens of thousands of dollars in additional borrowing capacity.

Nevertheless, the newly implemented debt-to-income (DTI) ratios may act as a constraint for some buyers. These regulations limit household debt to six times annual income for owner-occupiers and seven times for investors.

Despite these limitations, investors may find additional opportunities as test rates decline. With their higher DTI allowance of seven times income, investors can potentially increase their borrowing power beyond what owner-occupiers can access.

This increased borrowing power, coupled with relatively stable property prices, creates favourable conditions for buyers who have been previously excluded from the market.

Conclusion 

It’s worth noting that while borrowing capacity might increase, responsible lending principles still apply. 

Just because you can borrow more doesn’t mean you should stretch yourself to the maximum. 

Working with a Mortgage Adviser who can analyse your specific situation across multiple lenders remains the best approach to navigating this changing lending landscape.

A Mortgage Adviser with access to all major banks can:

• Compare test rates and actual interest rates across multiple lenders to find the best match for your financial situation

• Identify which banks are likely to maximise your borrowing capacity based on your unique circumstances

• Navigate the complexities of different debt-to-income (DTI) requirements and exemptions

• Access exclusive cashback offers that might not be advertised directly to consumers

With so much variability in test rates, lending criteria and special offers, working with a Mortgage Adviser can be the difference between securing your dream home and missing out on opportunities in this evolving market. Feel free to book a free consultation with me to see how these lower test rates might significantly increase your borrowing power and improve your homeownership prospects!