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Breaking out of mortgage prison: can easing serviceability buffers help?



Have you been keen to refinance but told you can’t? You’re not alone. Many Australian households are currently locked into their home loans due to rising interest rates. But some banks have recently started to lower their serviceability thresholds.

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 – 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’re locked into what’s called “mortgage prison”.


What’s mortgage prison?


You see, prudential regulator APRA has guidance in place that requires 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 13 short months, many mortgage holders are now unable to refinance because they can no longer meet the 3% mortgage serviceability buffer.


But, 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.


So 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 (more on that below).


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.


But for CBA you’ll need to have a loan-to-value ratio of at least 80%, a squeaky clean record of meeting all your debt repayments over the past year, and be refinancing to a principal and interest loan of a similar or lower value.


You’ll 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’ll also need a good track record of paying down all existing debts over the past 12 months, be refinancing to a loan that has lower monthly repayments than your existing one, and meet the 1% buffer test too, of course.


What’s the catch?


Ok, so under CBA’s new policy, for example, borrowers must extend their loan term out to 30 years.


Obviously this can cost you quite a lot in interest over the long run.


For example, 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 today, 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’d be extending your loan by an additional three years.


So while this option could help alleviate some financial stress now, you may have to pay for it over the long run – there’s a bit to weigh up.


Are the recent serviceability changes right for you?


Give us a call today 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”.


Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

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