There’s a secret mortgage rate that banks use but don’t disclose to customers.

The official cash rate is now 2 per cent and most mortgages are about the 4-5 per cent mark.

But that’s not the rate lenders use when assessing your application for a home loan.

Instead, they use a benchmark assessment interest rate that measures your ability to pay the loan if rates increase to a certain level.

Most lenders keep this rate hidden, but my sources say it currently varies from 7.2 per cent at the lower end to 8 per cent at the upper end.

Also called a floor rate or a test rate, it’s based on the lender’s actual rate plus a buffer of 2.5-3 percentage points.

The benchmark rates are made available to mortgage brokers, but are difficult to find for consumers.

Lenders don’t generally publish their benchmark rates on their websites, preferring to keep the marketing message simple. Two Big 4 banks told me it was confidential.

Sometimes you can find it published in information for investors – such as the annual report or full-year results – but it may not be out of date.

The difference between the actual rate and the benchmark rate is vast. Take someone with a $500,000 loan with both principal and interest to be paid over 30 years. At 4.5 per cent interest, the minimum monthly repayment is $2533. At 7.5 per cent, it would increase to $3496.

Of course, it’s sensible for mortgage lenders to make sure borrowers can afford higher rates, especially with the cash rate at a historic low.

It’s just a shame the methodology is so shrouded in mystery. It would be helpful for borrowers to understand this better.

I remember how frustrating it was trying to figure out our finance needs when we started our journey to buy a house.

I’d plug numbers into a home loan calculator on one of the bank’s websites and come up with repayments that I thought were reasonable, based on our rent and savings rate plus some wiggle room for a rate rise.

Then the “how much can you borrow?” calculator on the same bank’s website would tell me we couldn’t afford the loan and I couldn’t figure out why.

Now I realise that while the bank and I both factored in a buffer for a rate rise, we were using different figures. It would have been nice to know.

The variation among lenders would also be interesting to buyers who need maximum borrowing capacity. Obviously, it would be better for those customers to target the lenders with the lowest test rates.

The lender will also judge whether you can afford the repayments based on income, minus debt, other commitments and living expenses. They’re not looking at a set percentage of income, but if you’re doing your own sums remember that you’re considered to be in “mortgage stress” if loan repayments exceed 30 per cent of your pre-tax income.

When you read about banks tightening their lending criteria, this can include raising the benchmark rate, as well as other measures such as applying a higher rate for living expenses (as ANZ did this week) or limiting low-documentation loans.

If you don’t know that different lenders have different criteria, you might get knocked back by one, then give up.

Of course, understanding which lenders are conservative or aggressive is how good mortgage brokers earn their bread, but I can’t see why the information shouldn’t be public. I’m sure all the lenders already know the benchmark rates used by their competitors.

The other reason it would benefit consumers to understand the test rates is psychological.

In my household we are already trying to pay extra off our mortgage, but knowing that our bank thinks we can afford 7.5 per cent feels almost like a challenge to actually pay 7.5 per cent.

The benefits of doing so would be enormous.

Take that hypothetical $500,000 30-year loan. If your bank rate remains 4.5 per cent, but you choose to make repayments at the equivalent of 7.5 per cent, you would pay off the mortgage 12 years sooner and save more than $200,000.

If bank rates did eventually increase to 7.5 per cent, you would still save big bucks by making extra repayments now.

Knowledge is power.

Caitlin Fitzsimmons is editor of Money.

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Posted by Caitlin Fitzsimmons – The Age on 30th March, 2016