What is mortgage stress?
You're considered to be in mortgage stress when your mortgage repayments exceed 30% of your gross household income. At this level, there's limited room to cover other living expenses or absorb unexpected costs.
Severe mortgage stress is typically defined as repayments exceeding 50% of gross income.
APRA's 3% serviceability buffer
The Australian Prudential Regulation Authority (APRA) requires banks to assess your ability to service a loan at your actual rate plus 3%. This buffer is designed to protect borrowers from rate rises and was introduced (and later raised from 2.5%) to cool the property market.
Even if rates don't rise by 3%, you should be able to comfortably meet the stressed repayment.
Debt-to-income ratio
Banks also consider your Debt-to-Income (DTI) ratio โ total debt divided by gross annual income. Most Australian lenders are cautious above a DTI of 6ร, and APRA monitors banks' exposures to high-DTI loans.
| DTI ratio | Risk level |
|---|
| Below 4ร | Low risk โ comfortable serviceability |
| 4ร โ 6ร | Moderate โ manageable for stable incomes |
| Above 6ร | High โ scrutinised by lenders and APRA |
How to reduce mortgage stress risk
- Keep repayments below 25โ30% of gross income
- Build a cash buffer of 3โ6 months repayments in an offset or savings account
- Lock in a fixed rate if you're concerned about rate rises
- Reduce other debts before taking on a mortgage
- Pay down principal aggressively in early years while rates are manageable