In a move aimed at assisting borrowers trapped in mortgage difficulties, the Westpac Group has announced a reduction in stress test requirements for certain refinance applications.
Traditionally, banks subject borrowers to stress tests to ensure they can comfortably afford mortgage repayments even if interest rates increase by 3 percentage points above the applied rate.
However, this has posed a challenge for some borrowers looking to refinance with a more affordable lender, as they fail to meet the new bank's serviceability test at higher rates.
Starting from Monday, Westpac will allow select refinancers who do not meet the bank's standard serviceability test to undergo a "modified Serviceability Assessment Rate" as an exception, provided it exceeds the bank's floor rate.
This adjustment applies to refinance applications within Westpac and its subsidiaries, including St George, Bank of Melbourne, and BankSA.
However, eligibility for Westpac's "Streamlined Refinance" program requires borrowers to demonstrate a solid track record of debt repayment over the past 12 months, a credit score above 650, and other specified criteria.
Loans involving interest-only terms, debt consolidation, or lenders' mortgage insurance are excluded from this offering.
It's worth noting that while the Australian Prudential Regulation Authority's (APRA) serviceability guidelines do not prohibit banks from approving mortgages beyond their standard parameters, such cases are expected to be exceptions rather than the norm.
Non-bank lenders are not subject to these guidelines.
According to the APRA Quarterly Property Exposure Statistics for the December 2022 quarter, only 3.1% of new loans from banks were approved outside their standard serviceability policies, equating to approximately $4.66 billion worth of new home loans, including refinancers.
The current buffer, set at 3 percentage points, is designed to prevent new borrowers from taking on excessive debt relative to their incomes.
However, it has inadvertently trapped some existing borrowers in what is commonly called "mortgage prison."
Many of these borrowers initially secured loans near their borrowing capacity when interest rates were at historically low levels, and the APRA stress test stood at 2.5%.
However, these borrowers now find themselves in need of interest rate relief to navigate financial challenges.
While implementing separate stress tests for new and existing borrowers would pose operational complexities for banks, enabling those in mortgage prison to refinance could potentially mitigate the risk of loan defaults.
While borrowers in mortgage prison can still negotiate with their current lender for a rate reduction, substantial savings often come from refinancing to a more affordable lender offering competitive rates to new customers.
In February of the current year, APRA announced its decision to maintain the 3% buffer but acknowledged that it was not immutable and subject to adjustments based on changing risks to financial stability.
Potential home loan stress test rate under different serviceability buffers
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|Stress test||Big4 basic variable (5.97%)||One of lowest variable rates (5.25%)|
|Current buffer 3% pts||8.97%||8.25%|
|If buffer was 2% pts||7.97%||7.25%|
|If buffer was 1.5% pts||7.47%||6.75%|
|If buffer was 1% pts||6.97%||6.25%|
According to an analysis conducted by RateCity.com.au, an individual who borrowed at their maximum capacity two years ago, with a 20% deposit, and is currently on a basic variable rate with one of the big four banks, could be paying a rate of 6.44%.
This assumes that they have not renegotiated their loan during this period.
By refinancing to Westpac's lowest variable rate, starting at 5.59% for the first two years and increasing by 0.40% points thereafter, this borrower has the potential to reduce their rate by 0.85 percentage points.
As a result, their monthly repayments could decrease by $355.
Over the next two years, considering switch fees and cashback incentives, this borrower could potentially save nearly $14,000.
Refinancing to an even lower rate could potentially lead to even greater reductions in monthly repayments.
However, due to the standard serviceability tests, this borrower is unlikely to qualify for refinancing unless they have experienced a higher-than-average increase in income during this time.
Potential impact of refinancing for a borrower on the average wage who bought 2 years ago
Based on an owner-occupier paying principal and interest with a $664,955 debt remaining
|Rate||Monthly repayments||Cost over next 2 years|
Sally Tindall, RateCity.com.au research director said:
“Westpac is pulling down the barricade for borrowers in mortgage prison who don’t pass the banks’ serviceability tests at higher rates.
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.
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.
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."