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Call to cut refinancer stress test to let borrowers out of mortgage prison

Australia’s leading financial comparison site, RateCity, has called on the Australian Prudential Regulation Authority (APRA) to lower its stress test for refinancers.

The call comes after the Westpac Group announced it would lower the standard serviceability test for selected refinance applications in a bid to help borrowers out of what’s commonly referred to as “mortgage prison”.

Typically, banks stress test a borrower’s finances to ensure they can afford mortgage payments if rates rise three per cent above the initial rate they apply for.

This includes borrowers who are refinancing. 

As a result, some borrowers are unable to refinance to a cheaper lender because they don’t pass the new bank’s serviceability test at higher rates.

But from today, selected refinancers can be re-tested using a “modified Serviceability Assessment Rate”, provided it is above the bank’s floor rate and it is processed as an exception.

This applies to select refinance applications with Westpac and its subsidiaries, St George, Bank of Melbourne and BankSA.

“Westpac is pulling down the barricade for borrowers in mortgage prison who don’t pass the banks’ serviceability tests at higher rates,” Research Director, Sally Tindall, said.

“This is a strategic move from Australia’s second largest lender. 

“While many of these potential new customers are feeling the heat from the rate hikes, the bank has a range of checks in place to make sure it is lending responsibly.

“This decision from Westpac is potentially fantastic news for customers who are stuck with their current lender with limited places to turn, provided they can clear the bank’s checks and balances.”

To be eligible for Westpac’s new “Streamlined Refinance” customers will need a good track record of paying down all existing debts in the last 12 months and credit score of over 650, among other criteria.

Borrowers must be refinancing to a loan that has lower monthly repayments than their existing one. Interest-only terms, debt consolidation and loans that require lenders’ mortgage insurance do not qualify.

APRA’s serviceability guidance does not prevent banks from approving mortgages outside of their standard parameters, although these applications are expected to be exceptions rather than the rule. Non-bank lenders are not subject to these guidelines.

The latest APRA Quarterly Property Exposure Statistics for the December 2022 quarter show just 3.1 per cent of all new loans from the banks were approved outside their standard serviceability policies. In dollar terms this is $4.66 billion worth of new home loans (including refinancers).

Ms Tindall said APRA should consider lowering the stress test for all refinancers from the current buffer of three per cent.

RateCity analysis showed a single person on the average wage, who borrowed at capacity two years ago, on a big four bank basic variable rate with a 20 per cent deposit is currently paying a rate of 6.44 per cent, assuming they haven’t renegotiated their loan in this time.

By refinancing to Westpac’s lowest variable rate (5.59 per cent for the first two years, then +0.40 percentage points thereafter), the borrower could potentially see their rate drop 0.85 percentage points and their monthly repayments decrease $355.

Over the next two years, they could potentially save almost $14,000 once switch fees and cashback is factored in.

“While Westpac will only be applying a lower buffer on an exception basis, APRA should consider officially changing the stress test for refinancers looking for rate relief,” Ms Tindall said.

“Many Australians who borrowed at capacity when rates were at record lows and the buffer was at 2.5 percentage points are now lugging around giant loans compared to their incomes.

“It seems ridiculous to keep these borrowers locked up in mortgage prison when a decent rate cut could be enough to help them stay afloat.

“These borrowers have already signed up to the debt – the damage is done. Giving them a way to minimise the fallout is what they now need, and it’s important to have a range of lenders they can choose from,” she said.

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Kylie Dulhunty

Kylie Dulhunty is the Editor at Elite Agent.