How do banks decide if I can afford a mortgage?

Short answer: Banks test if you can afford payments at higher rates (buffer). Check debt-to-income ratio. Limit usually 6-7x income.

What this actually means in plain English

Banks use a serviceability test. They check your income, expenses, debts, and then apply a buffer. They calculate if you can still afford payments if rates rise 2-3%. They also check your debt-to-income ratio. In New Zealand, most banks limit total debt to 6-7 times your annual income.

Key Facts

Serviceability test = can you afford payments?
Buffer applied: rates 2-3% higher than current
Debt-to-income ratio: total debt / annual income
NZ limit: typically 6-7x annual income
Includes all debts: car loans, credit cards, student loans

Example

Income: $85,000

Debt To Income Limit: 6.5x

Max Total Debt: $552,500

Existing Car Loan: $15,000

Max Mortgage: $537,500

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