Australia’s second-largest lender has announced that it will lower the stress test on select refinance applications in a move that will help borrowers escape mortgage prison.
Select refinancers with Westpac and its subsidiaries, St George, Bank of Melbourne, and BankSA, who do not pass the banking group’s standard serviceability test can now 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.
But to be eligible for the bank’s new Streamlined Refinance, borrowers will need to have a good track record of paying down all existing debts in the past 12 months as well as a credit score of more than 650, among other criteria.
They must also 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.
“Westpac is pulling down the barricade for borrowers in mortgage prison who don’t pass the banks’ serviceability tests at higher rates,” said Sally Tindall (pictured above), RateCity.com.au research director.
“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.”
Should APRA also lower the stress test for refinancers?
Under APRA’s serviceability guidance, borrowers’ refinances are typically stress tested by banks to see if they can afford mortgage repayments if rates rose by three percentage points above the rate they are applying for and ensure they don’t take out excessive debts compared to their incomes.
But RateCity.com.au said the test is locking some existing borrowers into mortgage prison and that the prudential regulator should consider officially lowering the serviceability buffer for refinancers.
“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,” 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.”
While it would be more complicated to implement different stress tests for new and existing borrowers, enabling people in mortgage prison to refinance could potentially help prevent some from defaulting on their loan.
RateCity.com.au analysis showed that by refinancing to Westpac’s lowest variable rate (5.59% for the first two years, then +0.40% pts thereafter), a single person on an average wage, who borrowed two years ago on a big four bank variable rate with a 20% deposit, could see their current rate of 6.44% (assuming they haven’t re-negotiated their loan at this time) fall by 0.85 percentage points and their repayments drop by $355.
Over the next two years, they could potentially pocket nearly $14,000 in savings once switch fees and cashback are factored in. An even bigger drop in their monthly repayments is possible by refinancing to a lower rate.
The same borrower, however, would not be able to refinance under the standard serviceability tests, unless they have had a higher-than-normal pay rise.
APRA announced in February that it would retain the 3% buffer in place for now, but that it was not “set in stone” should risks to financial stability change.
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