You’re not alone if you’re keen to refinance but told you can’t? Many households are currently locked into their home loans due to rising interest rates. But some lenders have recently started to lower their serviceability thresholds. This can now help you potentially refinance.
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?
The 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. An added bonus is that official rates have now been on hold for 2 months.
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 lenders have reduced their refinancing serviceability buffers to as low as 1%, if borrowers meet certain circumstances (more on that below).
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.
As a general rule, 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.
Some lenders also require you to have a minimum credit score.
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?
Sometimes a lender will look to extend your loan term out to 30 years.
Obviously, this can cost you quite a lot in interest over the long run.
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?
Our local lending specialists work for you using our “Get to know you” program. Everyone wants to pay off their mortgage as fast as possible, but sometimes you may need a short period of relief. We’ll take you through multiple options and help your chances of refinancing success to help you escape “mortgage prison”.
Our lending specialists offer free advice and are available online, via phone, or in person.
Check out our guide on home loan refinancing!
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This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.