Breaking Free: Unleashing Yourself from the Mortgage Trap
As interest rates have climbed, Australians have refinanced in unprecedented numbers. In fact, a record high of $21.3 billion in refinancing took place in March 2023, according to ABS statistics, which is 14.2% higher compared to a year ago. But some people are now unable to refinance and take advantage of potential savings because they don’t meet lender requirements. They are locked into what is called “mortgage prison”.
What Is Mortgage Prison?
APRA has guidance in place that required lenders to stress-test all new mortgage applications at 3% above the interest rate the borrower applies for, even when refinancing. And since the RBA’s official cash rate has increased from 0.10% to 4.10% in just over a year, many mortgage holders are now unable to refinance because they can no longer meet the 3% mortgage serviceability buffer.
There is an “exceptions to policy” in APRA’s guidance that states lenders can override the 3% buffer for exceptional or complex credit applications if done prudently and on a case-by-case basis.
Recently some big players, including Westpac and Commonwealth Bank (CBA), reduced their refinancing serviceability buffers to as low as 1% if borrowers meet certain circumstances. Other smaller lenders are making similar moves, including Westpac subsidiaries St George, Bank of Melbourne and BankSA.
Many in the industry hope this will reduce mortgage stress and defaulted loans, given the current financial climate of rising rates and inflation.
What Are the Eligibility Requirements?
They differ from lender to lender.
For CBA you will need to have a loan-to-value ratio of at least 80%, a clean record of meeting all debt repayments over the past year and be refinancing to a principal and interest loan of a similar or lower value. You will need to meet the 1% mortgage serviceability buffer too.
For Westpac’s new “streamlined refinance”, you must have a credit score of more than 650. You will also need a good track record of paying down all existing debts over the last year, refinancing to a loan that has lower monthly repayments than the existing loan and meet the 1% buffer test too.
What Is the Catch?
For example, under CBA’s new policy, borrowers must extend their loan term to 30 years. Obviously, this can cost you quite a lot in interest over the long run.
RateCity research shows that if you took out a $500,000 loan with a Big Four bank three years ago, and if you applied for CBA’s refinancing offer, your mortgage repayments could drop by as much as $235 a month. But over the long run, you could pay up to an extra $32,117 in interest because you would be extending your loan by an additional three years.
So, whilst this option could help alleviate some financial stress now, you may have to pay for it over the long run, so there is a bit to weigh up.
What is “Mortgage Prison”?
Mortgage prison refers to the situation where homeowners are unable to refinance their existing home loans due to not meeting the lender’s serviceability requirements, often due to rising interest rates.
How have recent changes in interest rates affected refinancing?
The RBA’s official cash rate has increased from 0.10% to 4.10% in just over a year. This has led to many mortgage holders being unable to refinance because they can no longer meet the 3% mortgage serviceability buffer set by APRA.
What are the new serviceability buffers set by some banks?
Some big banks like Westpac and Commonwealth Bank have reduced their refinancing serviceability buffers to as low as 1% for borrowers who meet certain criteria. This is part of an “exceptions to policy” in APRA’s guidance.
What are the eligibility requirements for these new serviceability buffers?
The requirements differ from lender to lender. For example, for CBA, you need to have a loan-to-value ratio of at least 80% and a clean record of meeting all debt repayments over the past year. For Westpac, you must have a credit score of more than 650.
Is there a catch to these new serviceability buffers?
Yes, extending your loan term could result in paying more interest over the long run. For example, under CBA’s new policy, you could pay up to an extra $32,117 in interest because you would be extending your loan by an additional three years.
How can Zippy Financial help me navigate these changes?
Zippy Financial can guide you on ways to improve your chances of refinancing success and help you escape “mortgage prison.” They specialize in home loans, property investment, and vehicle finance.
Are the Recent Serviceability Changes Right for You?
Give us a call to find out more about refinancing and successfully navigating serviceability thresholds. We can guide you on ways to improve your chances of refinancing success and help you escape “mortgage prison.”
Zippy Financial is an award-winning mortgage brokerage specialising in home loans, property investment, commercial lending, and vehicle & asset finance. Whether you are looking to buy your first home, refinance or build your property investment portfolio, the team at Zippy Financial can help find and secure the right loan for you and your business.
About the Author:
Louisa Sanghera is an award-winning mortgage broker and Director at Zippy Financial. Louisa founded Zippy Financial with the goal of helping clients grow their wealth through smart property and business financing. Louisa utilises her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients achieve their lifestyle and financial goals. Louisa is an experienced speaker, financial commentator, mortgage broker industry representative and small business advocate.
Louisa Sanghera is a Credit Representative (437236) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025).
Disclaimer: This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether business, health or financial.