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Breaking Free of ‘Mortgage Prison’ and Exploring the Eased Refinancing Serviceability Buffers

Are you interested in refinancing but have been told it’s not possible? You’re not alone. Many Australian households are currently stuck with their home loans due to rising interest rates. However, some banks have recently started to lower their requirements for loan approval with reduced serviceability thresholds.

As interest rates have increased, there has been an unprecedented surge in Australians refinancing their mortgages. In March 2023 alone, a record-breaking $21.3 billion was refinanced, marking a 14.2% increase compared to the previous year, as per ABS statistics.

Unfortunately, some individuals are unable to refinance and take advantage of potential savings because they don’t meet the lenders’ criteria. This situation is often referred to as being in “mortgage prison.”

What exactly is a ‘Mortgage Prison anyway?’

Let’s understand what this means. The prudential regulator APRA has implemented guidelines that require lenders to stress-test all new mortgage applications at 3% above the applied interest rate, even for refinancing. With the official cash rate from the Reserve Bank of Australia (RBA) increasing rapidly from 0.10% to 4.10% in just 13 months, many mortgage holders can no longer meet the 3% mortgage serviceability buffer and are consequently unable to refinance.

However, APRA’s guidance allows for exceptions to the policy. Lenders can override the 3% buffer for exceptional or complex credit applications if they act prudently and evaluate each case individually.

Recently, some major players in the banking sector, such as Westpac and Commonwealth Bank (CBA), have reduced their refinancing serviceability buffers to as low as 1%, but this is subject to borrowers meeting specific circumstances. Other smaller lenders, including Westpac subsidiaries St George, Bank of Melbourne, and BankSA, are also adopting similar measures.

Many industry experts are hopeful that these changes will alleviate mortgage stress and reduce defaulted loans in light of the current financial climate characterized by rising rates and inflation.

Are you eligible?

Naturally, eligibility requirements may vary among lenders. For CBA, borrowers will need to have a loan-to-value ratio of 80%, a flawless track record of meeting all debt repayments over the past year, and be refinancing to a principal and interest loan of similar or lower value. Additionally, meeting the 1% mortgage serviceability buffer is a requirement.

Regarding Westpac’s “streamlined refinance,” borrowers must have a credit score above 650 and demonstrate a solid history of paying down existing debts over the past 12 months. They must also refinance to a loan with lower monthly repayments than their current one and satisfy the 1% buffer test.

So what’s the catch?

However, there is a catch. Under CBA’s new policy, borrowers must extend their loan term to 30 years. While this can reduce monthly mortgage repayments by up to $235, it could result in paying up to an extra $32,117 in interest over the extended loan duration. Therefore, it’s essential to carefully consider the long-term implications of such a decision.

If you’re wondering if these recent changes in serviceability thresholds are suitable for your situation, feel free to reach out on 1800-E-LOANS. We can provide guidance on refinancing options, offer advice on improving your chances of success, and help you escape the confines of “mortgage prison.” Give us a call today to learn more.

 
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Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

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