- Many banks have their own 'floor rates', different to APRA's 3% serviceability buffer.
- The bank will use the higher of the two to 'stress test' your home loan application.
- This is just one of three major factors banks look at with your application: The Household Expenditure Measure, and your Debt to Income Ratio are the other two.
A 'floor rate' is one of several ways lenders assess mortgage applications, along with things like a serviceability buffer. It helps assess whether a borrower would be able to pay the loan they are applying for if interest rates increase or if their financial circumstances change.
What is a 'floor rate'?
A floor rate is a minimum interest rate lenders 'stress test' mortgage applications against. If a borrower's serviceability adjusted rate is lower than a lender's floor rate, the loan will be stress tested against the floor rate.
Lenders typically use a floor rate together with a 'serviceability buffer' - APRA currently mandates a 3% buffer for Australian banks. That means if a borrower is applying for a loan with a 3.5% p.a. interest rate, they need to prove they would be able to make their repayments if the rate increased to 6.5% p.a.. If that lender had a floor rate of 7% p.a., that's what the loan would be assessed against since it's higher than the serviceability adjusted rate.
What are the floor rates at Australia's biggest banks?
Most Australian lenders don't currently make their floor rates public. One exception is Commonwealth Bank, which assesses home loan applications against the higher of 3% above the interest rate or a floor rate of 5.40% p.a.
Could APRA mandate a floor rate?
APRA has the authority to introduce floor rate requirements to all Authorised Deposit-taking Institutions (ADIs) in Australia. It previously mandated a 7% floor rate, introduced in 2014, but this was eventually dropped in 2021. However, APRA maintained at the time that it would "note rule out" that other measures including floor rates may still be reintroduced in future.
Savings.com.au's two cents worth
Floor rates become more relevant when interest rates are very low. For example, the Commonwealth Bank floor rate is currently 5.40% p.a., so for it to be used a borrower would need to be applying for a loan with a rate below 2.40% p.a., which is well below home loan rates in the current Australian market.
How else do lenders assess loan applications?
Lenders also use the Household Expenditure Measure (HEM) and check the debt-to-income (DTI) ratio of a borrower when assessing loan applications.
The Household Expenditure Measure (HEM)
The HEM is a benchmark lenders use to estimate living expenses. It takes into account details about the applicant like their age and gender, the area they live, their number of dependants and level of spending (basic, moderate or lavish). For a given borrower, the HEM will give an estimated minimum monthly expenditure. They are then judged against the higher of either this figure or their average historical spending.
Debt to income ratio (DTI)
Many lenders restrict loans for borrowers whose debt-to-income ratio (DTI) is above a certain amount.
As the name implies, DTI is a means for lenders to capture how big a borrower's debt commitments are relative to their annual income. To calculate DTI, you simply divide the total amount you owe across any loans (personal, car, home etc.) by your household annual before tax income.
Lets say you owe $400,000 on your home loan, have $50,000 remaining on your car loan and another $50,000 in credit card debt and personal loans. You earn $100,000 a year before tax. Your DTI would be 5 ($500,000/$100,000).
From February 2026, only 20% of the loan book of institutions regulated by APRA will be allowed to be lending to borrowers with a DTI above 6.
Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Extra Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
5.94% p.a. | 5.98% p.a. | $2,978 | Principal & Interest | Variable | $0 | $530 | 90% |
| Promoted | Disclosure | ||||||||||
5.89% p.a. | 5.80% p.a. | $2,962 | Principal & Interest | Variable | $0 | $0 | 80% |
| Promoted | Disclosure | ||||||||||
5.99% p.a. | 6.02% p.a. | $2,995 | Principal & Interest | Fixed | $0 | $0 | 60% |
| Promoted | Disclosure | ||||||||||
5.93% p.a. | 5.93% p.a. | $2,975 | Principal & Interest | Variable | $0 | $395 | 70% | Disclosure |
