Well, APRA has reaffirmed its stance that a 3% interest rate buffer is necessary to ensure responsible lending practices among banks when assessing home loan applications, including those from new buyers and existing borrowers looking to refinance.
This decision has the potential to impede the borrowing capacity of new buyers and create obstacles for existing borrowers seeking to refinance and reduce their borrowing expenses, according to Canstar's latest research.
The research highlights that the 3% buffer will result in new buyers with an average income of $94,000 losing out on $21,000 in borrowing capacity compared to the previous buffer rate of 2.5% that was in place until October 2021.
What does this mean?
When applying to refinance to a lower interest rate loan, existing borrowers may face difficulties being deemed unable to meet their repayment obligations by the lender, despite currently paying a higher interest rate with their current lender.
According to the analysis conducted by Canstar, an existing borrower repaying a $500,000 loan over 30 years with an average variable interest rate of 5.92% who applies to refinance to a lower interest rate loan of 4.69% would be assessed, taking into account the 3% buffer, at an interest rate of 7.69%.
In the event that the lender concludes that the borrower cannot manage a loan with a 7.69% interest rate, this suggests that the borrower would not be able to afford repayments even at a lower interest rate of 4.69%, despite presently repaying their loan at a rate that is 1.23% higher.
It is noteworthy that the advantages of refinancing are not taken into consideration during the evaluation.
By refinancing a $500,000 loan over a 30-year period from an average variable interest rate of 5.92% to a rate of 4.69%, borrowers may potentially reduce their monthly repayments by $382.
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Effie Zahos, Canstar's Editor-at-Large and money expert explains:
"When rates hit rock bottom there was certainly a need for APRA to raise the buffer rate.
As we reach the rate peak cycle, which clearly we have not, APRA would need to look at this again as it is impacting serviceability.
The buffer acts in the interest of protecting borrowers from rate hikes.
The issue is not around whether or not it is needed, it’s about the roadblock it’s causing for some existing borrowers trying to refinance to a lower rate.
Ironically the very regulation designed to protect consumers is working against those borrowers in mortgage prison.
In some cases, the benefits should be taken into consideration rather than the rules.
If borrowers have not defaulted on their repayments in the past 24 months, have the equity and their risk assessment remains the same, then surely refinancing to a lower rate should be possible.
From a consumer’s point of view, it never hurts to put a case forward for refinancing or to ask about other options.”