The Complete Guide to Stress-Testing Your Mortgage for Rate Increases

Published: January 22, 2026
Reading Time: 10 minutes
Location Focus: Sydney, NSW

Why Stress-Testing Matters

With the RBA expected to raise interest rates in February 2026, now is the perfect time to stress-test your mortgage. Stress-testing involves calculating how your mortgage repayments would change if interest rates increase, and assessing whether your budget can handle those higher repayments.

This exercise serves two important purposes. First, it helps you understand your financial capacity to handle rate increases. Second, it helps you make informed decisions about whether to lock in a fixed rate, increase your repayments, or restructure your loan.

This comprehensive guide will walk you through the stress-testing process and help you understand what the results mean for your financial situation.

Understanding Your Current Mortgage

Before stress-testing, gather information about your current mortgage. You'll need your current interest rate, your loan balance, your remaining loan term, and your current monthly repayment.

You can find this information in your loan statements or by contacting your lender. If you're unsure about any details, ask your lender or broker to clarify.

Step 1: Calculate Your Current Repayment

If you're on a variable rate, your current repayment is straightforward. It's the amount you're currently paying each month.

If you're on a fixed rate, your current repayment is also fixed. However, when your fixed rate ends, your repayment will change to reflect the variable rate at that time.

Write down your current monthly repayment. This is your baseline for comparison.

Step 2: Estimate Future Interest Rates

To stress-test your mortgage, you need to estimate what interest rates might be in the future. While no one can predict rates with certainty, you can use current market expectations and historical patterns to make reasonable estimates.

The RBA is expected to raise the cash rate by 0.25% in February 2026, bringing it to 3.85%. Most economists expect additional increases throughout 2026, with some forecasting the cash rate reaching 4.10% by year-end.

For stress-testing purposes, consider several scenarios. A conservative scenario might assume rates rise to 4.35% (0.75% above current levels). A moderate scenario might assume 4.60% (1% above current levels). An aggressive scenario might assume 5% (1.4% above current levels).

Step 3: Calculate Repayments at Higher Rates

Using an online mortgage calculator or working with a broker, calculate what your monthly repayment would be at each interest rate scenario.

For example, if you have a $400,000 mortgage at 3.60% with 25 years remaining, your current monthly repayment is approximately $1,850. At 4.35%, your repayment would be approximately $2,000. At 4.60%, it would be approximately $2,080. At 5%, it would be approximately $2,200.

Calculate repayments for each scenario you're considering. This gives you a range of potential future repayments.

Step 4: Assess Your Budget Impact

Now that you know your potential future repayments, assess how these changes would affect your household budget. Calculate how much additional money you'd need to find each month to cover the higher repayments.

Using the example above, moving from 3.60% to 4.35% would require an additional $150 per month. Moving to 4.60% would require $230 per month. Moving to 5% would require $350 per month.

Ask yourself honestly: can your household budget accommodate these additional costs? Do you have room to reduce other spending, or would higher repayments create financial stress?

Step 5: Identify Budget Flexibility

If your stress-test reveals that higher repayments would strain your budget, identify areas where you could reduce spending. Common areas include:

Discretionary spending such as dining out, entertainment, and subscriptions. Most households can reduce this spending if necessary.

Insurance costs. Shopping around for home and car insurance can often reduce premiums.

Utility costs. Improving energy efficiency or switching providers can reduce bills.

Transport costs. Reducing fuel consumption or using public transport can save money.

Groceries. Meal planning and shopping strategically can reduce food costs.

Most households can find $100-300 per month in savings if they're motivated. If your stress-test suggests you'd need more savings than you can realistically achieve, it might indicate you're borrowing more than is comfortable for your situation.

Step 6: Consider Your Loan Structure

Your stress-test results might suggest that restructuring your loan could help. Several options exist:

Switching from variable to fixed rate locks in your current rate, protecting you from future increases. However, you lose the flexibility of variable rates.

Increasing your repayment frequency from monthly to fortnightly can reduce interest costs without changing your rate. This works because you make 26 fortnightly payments per year instead of 12 monthly payments.

Splitting your loan between fixed and variable portions provides a middle ground. You get some certainty from the fixed portion while maintaining flexibility with the variable portion.

Extending your loan term reduces your monthly repayment but increases total interest paid. This should be a last resort, used only if you genuinely can't afford higher repayments.

A mortgage broker can help you evaluate these options and recommend a structure that works for your situation.

Step 7: Make Informed Decisions

Once you've completed your stress-test, you're in a position to make informed decisions about your mortgage. Your stress-test results should inform decisions about whether to lock in a fixed rate, restructure your loan, or make additional repayments.

If your stress-test reveals that you could comfortably handle rate increases, you might feel confident remaining on a variable rate. If it reveals that you'd struggle with higher repayments, locking in a fixed rate might provide valuable peace of mind.

Special Considerations for Sydney Borrowers

Sydney borrowers should be aware that Sydney's strong property market means many borrowers are highly leveraged. A 0.5% rate increase on a $600,000 mortgage means an additional $250 per month in repayments. For highly leveraged borrowers, this can create genuine financial stress.

Sydney borrowers should be particularly diligent about stress-testing their mortgages and ensuring they have adequate financial buffers to handle rate increases.

Common Stress-Testing Questions

What interest rate should I stress-test at? Most lenders stress-test at a buffer rate of 3% above your current rate. However, for your personal planning, you might stress-test at more conservative levels.

Should I stress-test if I'm on a fixed rate? Yes. Your fixed rate will eventually end, and you'll transition to a variable rate. Stress-testing helps you prepare for that transition.

What if I can't afford the higher repayments? If stress-testing reveals you can't afford higher repayments, consider whether you're borrowing too much. You might need to reduce your borrowing, increase your deposit, or delay your purchase.

Should I make extra repayments now? If your stress-test reveals you have budget flexibility, making extra repayments now can reduce your loan balance and interest costs. This also builds a buffer in your offset account.

Taking Action

If you haven't stress-tested your mortgage recently, now is an excellent time to do so. With interest rate increases expected in 2026, understanding your financial capacity to handle higher repayments is crucial.

Work with a mortgage broker to complete your stress-test. A broker can calculate your potential repayments at various rate levels, help you identify budget flexibility, and recommend loan structures that work for your situation.

The Bottom Line

Stress-testing your mortgage is a simple but powerful exercise that helps you understand your financial capacity to handle rate increases. By completing this exercise now, you can make informed decisions about your mortgage structure and ensure you're prepared for whatever interest rate environment 2026 brings.

Ready to stress-test your mortgage? Call Frontier Finance at 0413 798 731. Our brokers will help you complete a comprehensive stress-test and recommend strategies to prepare for rate increases.

Disclaimer: This article provides general information about stress-testing mortgages. Specific calculations and recommendations depend on your individual circumstances. Please consult with a qualified mortgage broker or financial advisor to discuss your specific mortgage situation and stress-testing needs.