Take a borrower on an average income of $94,000 with a $500,000, 30-year loan with a 6.98 per cent variable rate. They’re paying $3320 in mortgage repayments, according to Canstar, or 42 per cent of their income.
The rub is, if they try to shift to a rival lender with a lower 4.94 per cent interest rate, they’ll still be assessed on their ability to pay an extra three percentage points – a 7.94 per cent rate. While they’d be paying $2666 on that 4.94 per cent rate, they’re asked to prove they can pay the 7.94 per cent rate, or $3648 a month – $328 more than what they’re currently paying.
Emergency strategies don’t come for free, says Effie Zahos, as borrowers end up paying more interest over the long term.
Noting this, some lenders – including non-bank lender Resimac and big four bank Westpac – are beginning to look at side-door ways to bring good-quality borrowers through their doors, even if they don’t meet the traditional serviceability benchmarks.
Resimac has reduced its serviceability buffer to 2 percentage points, while Westpac and its subsidiaries St George, BankSA and Bank of Melbourne allows some refinancers to be tested under a “modified serviceability assessment rate”.
That means that if refinancers can’t meet the standard three percentage point serviceability buffer, they may still be able to refinance provided they can meet a 1 percentage point buffer, have a clean repayment history and a credit score of 650 or more.
Separately, Westpac, Macquarie Bank, Bankwest, Bank of Queensland and Ubank are among those allowing some workers who are regularly paid overtime – such as emergency services workers – to have 100 per cent of their overtime and allowances assessed as part of their home loan applications. Lenders typically take only 80 per cent of this type of income into account.
“They’re trying to take away a bit of the friction of moving. The banks are obviously very driven by new-to-bank customers, and they want those volumes,” says Dixon.
“The biggest ones are … those clients who onboarded with a bank last year, passed with flying colours, got their loan, and now they seemingly are not a bankable client. Sometimes they’re good clients who started off with a great interest rate … and are now all of a sudden paying a lot more than anyone else.
“There are a few banks who have recognised this, and they want those customers who are paying on time and are able to service their mortgage, but maybe not through the traditional metrics.”
But while the changes make it easier for some borrowers to move, it doesn’t go anywhere near completely alleviating the challenges for those in mortgage prison, says Zahos.
While some lenders have begun playing with their serviceability measures, she anticipates that other lenders won’t follow until it’s clear that the RBA has finished its rate-hike cycle.
“I’m surprised other lenders haven’t followed Westpac, but when you think about it, have we reached the peak in the interest rate cycle?” she asks.
“When Westpac came out with this change, it was considered that we had almost reached a peak, so it made sense to reduce the buffer. But now it looks like there are still another couple of rate hikes under the RBA’s belt. If that’s the case, that will make some lenders nervous to reduce this buffer.”
Dixon adds that while the policies will help some borrowers, they will be limited to those who are keeping up with their repayments and can still prove that they’re not at risk of falling into financial stress, or among – he estimates – around 10 per cent of borrowers in the mortgage prison bucket.
Borrowers really struggling to keep up with mortgage repayments will need to look at alternative solutions.
The first step is to look at the existing lender and see if they have a lower advertised rate that they can access. “If you’re paying more than that, that is the simplest phone call you’re ever going to make,” says Zahos.
“You’ve got to question, ‘why is it advertised X when I’m paying Y’. That’s your first port of call.”
The next step is looking at your bank’s hardship policy and getting in touch. “You can claw back $300 or $400 on the average mortgage per month by either going interest-only or increasing your term.”
However, she adds, these emergency strategies don’t come for free – borrowers will end up paying more interest over the long term.
The same goes for lenders’ changed serviceability metrics – both Zahos and Dixon agree that borrowers need to do the maths to check that, even with the reduced serviceability buffer, switching lenders is still in their best interests.