The Covid Rate Trap – Are You Caught In It?

THE LOANS SUITE · CLIENT EDUCATION SERIES

If you bought your home between 2020 and 2022, there’s a very good chance your loan was assessed under conditions that no longer exist. Here’s what that means and what you can do about it.

What Is an Assessment Rate and Why Does It Matter?

When a bank approves your home loan, they don’t just check whether you can afford repayments at today’s rate. They apply what’s called an assessment rate, a higher, hypothetical rate used to stress-test your finances. The idea is simple: interest rates move. Can you still afford your loan if they go up?

This buffer is calculated by adding a margin on top of the Standard Variable Rate (SVR), typically 3% above whatever the SVR is at the time of application.

How It Works: If your Standard Variable Rate is 6.00%, the bank assesses your ability to repay as if your rate were 9.00%. You need to service the higher figure to get approved. This protects you and the bank against rising rates.

What Happened During Covid (2020 to 2022)?

When the pandemic hit, the Reserve Bank of Australia slashed the cash rate to historic lows. Variable home loan rates dropped dramatically, with some lenders offering rates as low as 1.99%. To reflect this, APRA lowered the minimum assessment rate floor, and lenders pulled their assessment buffers down accordingly.

At the peak of the low-rate era, many lenders were assessing borrowers at rates as low as 5.00 to 5.50%. For the first time in a generation, buyers could borrow significantly more, and they did.

2020 to 2022 (Covid Era) Today (2025) Variable Rate 1.99% 5.99% Assessment Rate 5.00 to 5.50% 8.99%+

The problem? Rates didn’t stay low. The RBA hiked the cash rate 13 consecutive times. Many borrowers who were assessed at 5.50% are now making repayments at rates higher than that assessment figure. In some cases, their actual repayments have exceeded what the bank originally tested them against.

⚠️ If you were approved in 2020, 2021, or 2022, your loan was assessed at a rate that may be lower than what you’re actually paying today. That is the Covid Rate Trap.

Are You Experiencing Mortgage Stress?

Mortgage stress occurs when your home loan repayments are consuming more of your income than is sustainable. It can creep up gradually, a rate rise here, a cost-of-living squeeze there, until one month it becomes very real, very fast.

Not sure where you stand? We’ve built a free tool to help you find out in minutes.

👉 Try our free Mortgage Stress Calculator

Who Is Most At Risk?

First home buyers are feeling this the hardest. They typically borrowed at their maximum capacity because that’s what the low rates and low assessment floors allowed. With repayments now significantly higher than what was originally stress-tested, household budgets are under real pressure.

We’re seeing clients who are genuinely struggling, not because they were irresponsible, but because the goalposts moved dramatically on them. This is not a personal failing. It is a structural consequence of an extraordinary rate cycle.

So What Can You Do?

You are not without options. At The Loans Suite, we work with clients every day to find practical paths forward. Here are three strategies worth exploring:

1. Switch to interest-only repayments. Some lenders will allow owner-occupier clients to move to an interest-only structure. This significantly reduces your monthly outgoing, buying you breathing room. Yes, it means you pay the loan down more slowly. But keeping your home is more important than the pace at which you own it outright.

2. Refinance to a more competitive lender. Your current lender may not be your best option anymore. A fresh assessment with a different lender, potentially at a lower rate or with different product features, could meaningfully reduce your repayments and put you in a stronger position.

3. Extend your loan term. If your loan still has 22 years remaining, re-amortising over 30 years again reduces the monthly repayment. The total interest paid increases, but affordability today is the priority when the alternative is losing your home.

Reality check: Will you still live in that home in 30 years? Statistically, probably not. Most Australians move every 7 to 10 years. The goal right now isn’t to fast-track paying off the loan. It’s to protect your asset, your equity, and your financial future. A longer term or interest-only period is a tool, not a failure.

The One Thing You Must Not Do

Do nothing. Mortgage stress doesn’t resolve itself. The banks won’t call you proactively to offer a better deal. Hardship provisions exist, but accessing them has consequences for your credit profile. The earlier you act, the more options you have on the table.

If you’re already in arrears or close to it, the situation is serious but it is still workable with the right broker in your corner. We have seen clients restructure their way out of difficult positions. It takes honesty, urgency, and a plan.

Start by running your numbers through our Mortgage Stress Calculator then book a call with our team to talk through what the results mean for you.

The Loans Suite · Finance. Strategy. Results. Where smart lending builds real wealth.