The ‘phantom’ home loan rate: why your mortgage is being assessed at an extra 3%

Home loan interest rates have been on a slow and steady decline since the beginning of the year, and the average variable in our database is sitting just below 6% p.a. – but is this the rate banks are actually assessing you on when you apply for a mortgage?

You might be surprised to hear it’s not.

Instead, the rate you’re assessed for during the approval process is likely to be 3% higher than the advertised rate. That means if your lender offers you its best home loan rate of 6% p.a., you’re actually getting tested for repayments at 9% interest.

Your rate + 3% = the phantom rate

We call it your phantom rate. You won’t see this number on your mortgage statement every month, but it’s what makes or breaks your ability to get a home loan.

Why are banks adding an extra 3% to their rates when assessing home loan applications? It’s an official requirement from the financial regulator – the Australian Prudential Regulation Authority (APRA) – and it’s got to do with your home loan serviceability.

This is a process that lenders use to determine your ability to pay off a mortgage over time.

Think of it as a way to stress test your finances – the banks want to know that you can not only afford your repayments at the current rate, but that you can still afford to pay your mortgage if rate hikes were to come in the future.

To see how much money you might be able to borrow – at current rates and in the face of interest rate rises with the phantom rate applied, you can use Mozo’s borrowing calculator.

Borrowing calculators take into account your yearly income, living costs, and other ongoing debts such as credit cards to figure out how much you can afford to borrow, so they’re most useful if you have an overall understanding of your earnings and expenses.

As an example, let’s take a person with a yearly income of $100,000 after tax and $2,865 in monthly living costs – that’s the average monthly household spending in Australia according to the Australian Bureau of Statistics (ABS) data from January 2025.

If they apply for a home loan at 6% interest, their lender will make their assessment based on a ‘phantom rate’ of 9%. It means the buyer could be able to borrow $651,615 according to our calculator.

The borrower’s monthly repayments will start at $4,198 a month, but if rate hikes hit and their rate increases by 3%, monthly repayments would jump up to $5,468 at 9% interest.

Lenders don’t want to approve you for a loan that you could default on later down the track, so while the 9% phantom rate is high, it helps protect the lender and yourself from getting into financial trouble.

Back in July 2025, APRA reaffirmed that it would be keeping the mortgage serviceability buffer at 3% given high levels of existing household debt and above average total credit growth.

Given that the ‘phantom rate’ isn’t going anywhere soon, it’s best to get familiar with the ghost if you’re saving up for a house deposit or looking to refinance your mortgage.

There are steps you can take to offset its impact and increase your home loan serviceability:

• Lower your expenses: lenders typically look at your cost of living over the past three months when deciding how much you can borrow, so tighten your spending if you can.

• Lower your credit card limit: your bank will assess any credit cards you have, including the max credit limit available to you – our tip is to lower the credit limit of your card before applying for a home loan.

• Clear the debts you can: monthly debts such as credit cards or personal loans can eat away at your overall borrowing power, so aim to pay off debts that are attracting high interest if you can.

• Boost your savings: you need to show genuine savings over time to prove you have a reliable track record with your finances. Give yourself a boost by looking at the current savings rate on your account, and compare it to some of the best high interest savings accounts on the market.