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Affordability · rate-shock stress test
Stress-tested payment at a rate shock
Recompute a level loan payment at a shocked rate you choose, beside the baseline payment and the increase the rate move would add each month.
Verified engine
What the engine returns
Read the increase first: it is the extra amount the household must find every month if the move happens, and the honest question is whether the current budget absorbs it without cutting anything that matters. The stressed payment beside the baseline shows the same fact as a level rather than a change.
Inputs the result is built from
Loan principal
Annual interest rate
Loan term
Payments per year
Rate shock
How the result is derived
MethodThe level payment relation evaluated twice over the same principal, term and payment frequency — once at the quoted annual rate and once at that rate plus the shock in percentage points — with the difference between the two payments reported as the increase.
StandardStandard rate-shock affordability stress test
GuardA shock that would push the annual rate below nothing is refused — a negative shocked rate describes no lending arrangement worth stressing, and the comparison would be against a fiction.
How the payment moves with the rate shock
The payment that has not happened yet
The exercise holds everything about the loan still except the rate. Principal, term and payment frequency stay fixed; the annual rate moves by the shock; the level payment is computed at both rates. Three figures come back — the stressed payment, the baseline, and the increase between them — and the increase is usually the one the budget conversation needs.
The shock is added in percentage points, not scaled proportionally: the same shock is the same absolute rate move whatever the starting rate. That convention has a consequence worth knowing — a given shock hurts a low-rate loan proportionally more, because it is a larger fraction of the interest the payment was built on.
The shock size is supplied, not embedded. Regulators and lenders publish stress standards, the standards differ between jurisdictions and are revised over time, and a page that baked one in would misstate the test the reader actually faces. The pack ships an illustrative default and treats the governing standard’s figure as the one that counts.
A downward shock is allowed too — the same instrument reads a hoped-for rate fall — so long as the shocked rate stays at or above nothing. The payment arithmetic itself is the ordinary level-instalment relation, with the annual rate divided by the payment frequency in the nominal convention lenders quote.
The level payment relation evaluated twice over the same principal, term and payment frequency — once at the quoted annual rate and once at that rate plus the shock in percentage points — with the difference between the two payments reported as the increase.
When this calculation is used
- Deciding between a fixed and a variable rate by pricing what the variable one becomes after a plausible move.
- Checking a budget against the shock a lender’s stress test will apply before the application is made.
- Comparing how the same shock lands on a short term and a long one, where the exposure differs more than intuition suggests.
- Working the declared reverse workflow: fixing the stressed payment a budget tops out at and recovering the shock size it could absorb.
Worked example
An ordinary mortgage at a quoted rate with monthly instalments, shocked upward by a few percentage points — the shape of the check a variable-rate borrower runs before choosing against fixing.
Read the increase first: it is the extra amount the household must find every month if the move happens, and the honest question is whether the current budget absorbs it without cutting anything that matters. The stressed payment beside the baseline shows the same fact as a level rather than a change.
Then run the declared reverse workflow: fix the largest payment the budget could truly carry and recover the shock that reaches it. That figure — the household’s own tolerance, in rate terms — is worth knowing before any lender states theirs.
What each input represents
Loan principal
The amount borrowed — the balance both payments are computed over. For a loan already running, the honest figure for a repricing check is the current outstanding balance rather than the original advance.
Annual interest rate
The baseline: the nominal annual rate as quoted today. The baseline payment is computed here, and the shock is applied on top of this figure, so an error in it shifts both sides of the comparison.
Loan term
How long the loan runs, in years. The same term is used at both rates — the test asks what the payment becomes, not whether the term could stretch to soften it, which is a different and costlier remedy.
Payments per year
How many instalments fall in a year — twelve for monthly, twenty-six for fortnightly. It sets both the periodic rate and the payment count, at the baseline and under stress alike.
Rate shock
The move to test, in percentage points added to the annual rate. The pack ships an illustrative default; the size that governs an application is whatever the relevant stress-test standard prescribes. A negative shock tests a rate fall instead.
Assumptions and limits
- The shock applies immediately and for the whole remaining term — a full repricing, not a gradual drift.
- The loan is fully amortising with level payments, and the periodic rate is the annual rate divided by the payment frequency — the nominal convention, not an effective rate.
- Principal and term are unchanged by the shock; refinancing, term extension and fees are outside the test.
- The shock size is the reader’s choice; no regulatory standard is embedded, and standards differ by jurisdiction and over time.
What the guards protect against
- A shock that would push the annual rate below nothing is refused — a negative shocked rate describes no lending arrangement worth stressing, and the comparison would be against a fiction.
- A zero or negative principal is refused: there is no payment to stress on nothing borrowed.
- A term of nothing is refused, and the payments per year must be at least one, so both schedules contain real payments.
- The baseline rate and the shock are each bounded to realistic ranges; a figure outside them is refused rather than extrapolated, because the result would describe no real loan.
Provenance
Standard rate-shock affordability stress test
The level payment relation evaluated twice over the same principal, term and payment frequency — once at the quoted annual rate and once at that rate plus the shock in percentage points — with the difference between the two payments reported as the increase.
Educational reference, not financial advice, and not any regulator’s stress test — the shock is an input. The signed pack carries its own citation; the page reports the verification state of the release it mounted rather than asserting one.