The test in plain language
A lender adds up your reliable income, subtracts tax, existing debt repayments and your living costs, and looks at what is left over each month.
They then check whether the mortgage repayments would fit inside that leftover amount with room to spare. If they do, the loan is serviceable. If they do not, the loan is reduced until it fits.
Why the test uses a buffer
Lenders do not test your repayments at the rate you would actually pay. They test at a higher rate — a buffer above current pricing — so that you would still cope if rates rose during your loan.
That buffer is why your borrowing power does not automatically jump the moment rates fall. The rate you are quoted and the rate you are tested at are two different things.
What moves the result
Anything that changes the surplus changes serviceability: a pay rise, a debt paid off, a card limit reduced, a new dependant, a change in living costs or a switch from salaried work to self-employment.
The loan term matters too. A longer term spreads repayments further and can improve serviceability, though it usually means more interest over the life of the loan.
If you already have a mortgage
Refinancing is assessed the same way. Your circumstances are tested again, so a loan that was approved a few years ago is not automatically approved today — and equally, a stronger position now can open up better options.
Where to from here
If you are looking at your existing lending rather than a first purchase, comparing what is on offer is the sensible starting point.