Debt Stress Testing in Australia

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by: George Pettit
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Word Count: 355

A debt "stress test" is a method of determining if one's finances are sturdy enough to handle an unexpected shock such as unemployment, extended illness, or divorce. Many Melbourne mortgage brokers will offer (or even require) this service before making a loan, to ensure that a borrower can continue to make timely payments even in the result of a financial disaster. While somewhat unpleasant, the fact that a person's credit could survive a major financial setback makes them an ideal candidate for a loan, and may significantly decrease their interest rate and their monthly payments since they are much less of a risk to a lender.

To "stress test" one's finances, it is necessary to gather an extremely high quantity of financial detail, especially in regards to one's earnings, the value of one's property, and the nature of their investments. This data is then fed into a complex series of computer models, which determines the borrower's ability to repay the debt while maintaining a modest standard of living in the event of a financial disaster. Since any small error can lead to an erroneous simulation during the test, accuracy and complete openness is required. While some borrowers object to such high levels of financial openness, hiding assets or lying about them tends to work against the borrower during the simulation. If the simulation's accuracy is in doubt, then it is useless for the purpose of lowering loan payments, and the borrower will not receive the full benefits.

The current shakiness in the mortgage market has led many Melbourne mortgage brokers to require or at least highly suggest that these tests take place. This is because if a borrower successfully passes the test, then the lender knows that the loan is a very low risk and thus worth taking. They may not only award the borrower with lower fees, but they may be able to find a loan that more closely suits the borrower's finances, due to the fact that they now know those finances in detail. Thus, having a stress test is one of the smartest things a Melbourne borrower can do.

About the Author

George Pettit is a journalist and president of Mortgage Brokers Melbourne Group (MBMG). He is often writing about home loans, refinancing, debt consolidation and similar popular topics.

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