How I Stress-Test Home and Investment Loans Before Banks Do

Most people run numbers assuming everything goes right. In 2026, that’s backwards.

Stress-testing your home and investment loans means modelling at least a 3% interest rate rise, flat or falling rents, and a few months of vacancy to see if you’d still cope for 6–12 months. Done properly with your broker, it becomes a decision tool: refinance, hold, de‑gear, or walk away from a risky purchase before it bites.

Roy Morgan’s 2026 data shows 28.2% of Australian mortgage holders are already ‘At Risk’ of mortgage stress, with more exposed if the cash rate rises again. The RBA has lifted the cash rate sharply back towards 4.35% to contain inflation, and has been clear it will move again if needed. Waiting for banks to run their own tests on your situation is not a strategy.

The real point of stress-testing (it’s not to scare you)

The mistake I see most is people treating a stress test as a doomsday exercise. In practice, it’s the opposite: it’s a calm, numbers‑based way to buy yourself options.

What I tell my clients

When I sit down with a client — whether it’s a first‑home buyer in Mascot, a self‑employed café owner, or a couple with three investments — we start with three questions:

1. If rates rose 3% and stayed there, could you hold everything for 12 months?
2. If an investment sat vacant for three months, would you need to sell something?
3. If your income dropped for six months, what’s your plan B?

If we can’t answer those with confidence, we don’t ignore it; we adjust. That may mean:

• Restructuring loans
• Building buffers in offset
• Slowing down new purchases
• Or, sometimes, selling a weaker asset on your timetable, not the bank’s

Stress-testing is not a product. It’s a way of thinking about risk that should sit behind every home and investment loan decision.

How banks already stress-test you (and why that’s not enough)

The bank’s view: policy, not your life

Every lender applies a buffer when they assess you. Since APRA’s 2021 guidance, that’s typically 3% above the actual rate. On top of that, they:

• Use benchmark living expenses (HEM) that may not match your real life
• Shade rental income (often using only 70–80%)
• Ignore some future changes you know are coming (like kids, business expansion, part‑time study)

The test they’re running is simple: “If rates go up a bit, is this borrower still probably okay?” That’s not the same as: “Is this setup sensible for your goals, age, and tolerance for risk?”

For multi‑property investors, APRA‑style servicing can say “yes” even when portfolio‑level risk is high: portfolio LVR over ~85% and thin cash buffers materially increase forced‑sale risk during rate rises or policy changes (see /insights/red-flags-over-gearing-property-portfolio-de-risk-gently).

Why your own stress test should be tougher

Across our geared‑property work we’ve found a practical baseline:

• Add 3% to your current rates on all loans
• Hold rents flat (or cut them slightly)
• Model three months’ vacancy per property
• Assume no negative gearing benefit on new established investments after 12 May 2026, in line with announced reforms

If you’re within 10 years of retirement, I push the test harder: 3% rate rise plus three months’ vacancy, and I want your buffers to last 6–12 months of full costs.

A worked example: one home, one investment, one shock

Let’s make this real. Say you have:

• Home loan: $800,000, principal & interest, 25 years remaining
• Investment loan: $600,000, interest‑only
• Current interest rate: 5.5% on both (illustrative)
• Rent: $700 per week ($36,400 p.a.)

Today’s numbers (approximate)

• Home loan repayment at 5.5%, 25 years: about $4,918 per month
• Investment interest at 5.5%: about $2,750 per month
• Rent in: about $3,033 per month (ignoring costs and vacancy)

Net cashflow effect from the investment before tax and other costs is slightly negative once you add strata, maintenance and insurance.

Stress test: +3% rates, flat rent, 3 months’ vacancy

We re‑run at 8.5%:

• Home loan repayment: jumps to about $6,497 per month
• Investment interest: jumps to about $4,250 per month
• Rent: still $3,033 per month when tenanted, but assume 3 months’ vacancy over the year

Over 12 months:

• Extra home loan cost vs today: roughly $19,000 p.a.
• Extra investment loan cost vs today: roughly $18,000 p.a.
• Lost rent from three months’ vacancy: about $9,100

That’s around $46,000 worse off per year before tax. It’s consistent with our wider finding that a 2–3% rise on a $600k–$800k loan typically worsens annual cashflow by $12,000–$24,000 if rents stall.

Now ask: “If that happened and stayed that way for two years, could we hold?” If the honest answer is no, the point is not to panic. The point is to change the plan now while you still have options.

Modelling a 3% rate rise quickly shows how repayments and cashflow change.