Opinion
Just in time, lenders are freeing borrowers from ‘mortgage prison’
Nicole Pedersen-McKinnon
Money contributorHow is it sensible for a mortgage holder who is coping with rates and repayments at the current level to be denied refinancing because their bank deems they’d be unable to cope with repayments at a lower level?
It’s entirely illogical, but that’s essentially what’s been happening. It’s a high-profile and prevalent mortgage prison.
Big banks and other lenders are, thankfully, rethinking their mortgage “stress tests” that left refinancers trapped.Credit: Peter Rae
This scary predicament is because the now 4 per cent of rate rises have exceeded the 3 per cent you must prove you can handle to get approved for a home loan.
So, as rates have risen, this “stress test” has meant that – for many – the ability to refinance to cut their repayments has slipped away. Except that they are already coping with a rate up at that level and higher, so they could surely cover the cost of a lower one. See the issue?
Three of the big four banks and one online lender agree with me, and have one by one relaxed their approval requirements for refinancers.
ANZ is the odd one out, and it looks as though will stay that way. The bank’s chief executive, Shayne Elliott, last week said the 3 per cent serviceability test is appropriate because “we don’t know what the future holds”.
This, despite banking regulator APRA recently implying assiduous amendments could be made to the test. The rest of our big banks have taken that to mean that not a 3 per cent, but a 1 per cent buffer is appropriate.
Full credit to Westpac for going out on this lending limb first. Next came Australia’s largest mortgage issuer, CBA, but the special treatment it is extending has both positives and potential negatives for recipient borrowers in that you must extend your new loan term to 30 years.
This means the required monthly repayments could drop dramatically – the older the loan, the more they should fall.
But the negative is that paying debt off over a longer period will mean borrowers could ultimately part with far more in interest – no one can accuse CBA of being silly!
Except borrowers could always combat this with mortgage over-payments (vital tip: for flexibility and safety, these should go into attached offset accounts).
Indeed, I always advocate the longest possible loan term to keep your repayment obligations as low as possible, and then throw any extra into offset accounts that you can.
But lenders’ criteria are comparable. To be eligible, you mostly need at least 20 per cent equity in your home, a principal-and-interest loan, and a good credit score and repayment history.
So, if you have missed repayments, this special allowance is unlikely to be available and your best strategy is to ask for hardship provisions. As I have been saying for a while, in tougher times, confessions get concessions.
The online lender to follow suit so far, lowering the serviceability test from 3 per cent to 2 per cent for all applicants, is loans.com.au.
Refinances of the original or a lower amount need a less conservative qualification criteria, to give borrowers back some breathing space.
Note that cheaper non-bank lenders like loans.com.au are regulated differently and don’t need to apply the 3 per cent stress test anyway, but their offset accounts are (dangerously) not quarantined from loans themselves, as those offered by authorised deposit-taking institutions are (some of them are also not covered by the Australian government’s $250,000 deposit guarantee).
In any case, the end of the 3 per cent stress test also has the potential to alleviate the pain of people coming off rock-bottom fixed rates and facing a vertical leap in repayments.
This is particularly because a lot of these rock-bottom fixed rates were offered by lenders with uncompetitive, high variable rates to try to migrate this low-leading fixed business across to excessive variable profits when they ended. Regular readers will recall I warned about this at the time.
So, the same borrowers facing the so-called mortgage cliff could then also be trapped in mortgage prison. This case-by-case stress-test waiver may offer an escape.
To be clear, I’m not advocating lower hurdles for loans for new homes. And there should be no relaxed requirements for loans refinanced for larger amounts than originally borrowed.
But refinances of the original or a lower amount need a less conservative qualification criteria to give borrowers back some breathing space.
Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me. Follow Nicole on Facebook, Twitter or Instagram.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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