CBA follows Westpac by slashing stress test for refinancers – with a catch

Australia’s biggest bank, CBA, has announced it will lower the stress test on select refinance applications from 3 percentage points to just 1 percentage point.

The APRA guidelines require banks to stress test all new mortgage applications to ensure the borrower can still afford their repayments if rates climbed 3 percentage points above the original rate they applied for, even if the application is a refinance.

As a result, some borrowers, typically those who bought at capacity when rates were at record lows, can no longer refinance to a cheaper lender because they don’t pass this serviceability test at higher rates.

From Friday (23 June), refinancers who do not pass CBA’s standard serviceability test on a 30-year loan term, can be re-tested using the bank’s new “Refinance Alternate Assessment”, which includes a 1 percentage point buffer, provided it is above the bank’s floor rate, which is currently 5.40 per cent.

CBA’s lowest variable rate for an owner-occupier paying principal and interest with a 20 per cent deposit is currently 6.34 per cent. This means a potential refinancer applying for this loan could be stress-tested at 7.34 per cent, rather than 9.34 per cent.

To qualify, refinance customers must have a loan-to-value ratio of at least 80 per cent, a good track record of paying down all existing debts in the last 12 months and be refinancing to a principal and interest loan of a similar or lower value (CBA will permit refinancers to take out an extra $10,000 or 1% of the loan size, whichever is higher).

Critically, the loan must be refinanced back out to a 30-year term which has the capacity to cost some borrowers thousands of dollars in the long term.

The move comes almost two weeks after Australia’s banking regulator, APRA reiterated that the buffer was “an important risk mitigant”, and warned banks to make sure any changes to their exception processes were “implemented prudently” on a case-by-case basis.

Non-bank lenders are not subject to these guidelines.

The latest APRA Quarterly Property Exposure Statistics for the March 2023 quarter show 2.8 per cent of all new loans funded from the banks were approved outside their standard serviceability policies. In dollar terms this is $3.76 billion worth of new home loans (including refinancers).

CBA’s ‘get out of jail’ card is by no means free

This move by CBA will potentially help thousands of borrowers escape mortgage prison and refinance to a lower rate.

However, under CBA’s new policy, these borrowers must extend their loan term back out to 30 years, which can come at a significant long-term cost.

RateCity.com.au research shows that someone who took out a $500,000 loan three years ago in June 2020 with a big four bank could see their repayments drop by $235 if they refinanced to CBA’s lowest variable rate loan with a 20 per cent deposit under this new option.

However, because they would be extending out their loan term by an additional 3 years, they would end up paying an extra $32,117 in interest over the life of their loan, compared to if they had not refinanced at all.

If they instead took out Westpac’s lowest rate loan with a 20 per cent deposit, which has a current introductory rate of 5.94 per cent, they would see their repayments drop by an additional $10 a month, even if they kept their loan term the same at 27 years remaining.

Over the life of the loan, that person would pay $45,078 less in interest than the ‘do nothing’ option, and $77,195 less than the CBA option.

This assumes the cash rate rises in line with ANZ’s cash rate forecast.

Impact of refinancing and extending out loan term by an additional 3 years

Source: RateCity.com.au. Notes: assumes person took out a big four bank variable loan with a 20% deposit in July 2020 and has not renegotiated since. Assumes cash rate increases in line with ANZ’s forecast. Westpac’s current lowest rate is an introductory variable loan which rises by 0.40 per cent after 2 years.

RateCity.com.au research director, Sally Tindall, said: “CBA has followed in Westpac’s footsteps, clearing the way for other banks to start assessing mortgage prisoners at a lower stress test.”

“Australia’s biggest bank is ready and willing to help refinancers in mortgage prison, but borrowers considering this option should be aware it comes with a costly catch,” she said.

“Forcing refinancers to extend their current loan term has the potential to cost tens of thousands of dollars over the life of their loan – something that should be considered as one of the last resorts, rather than a first port of call.

“What these borrowers need is options, and ideally ones that aren’t going to come back to bite them in the long run.

“While APRA has reiterated its commitment to the current buffer, it has confirmed banks can bend the rules on a case-by-case basis, provided they dot their ‘i’s’ and cross their ‘t’s’ to mitigate any risks.

“We expect more banks to tweak their serviceability policies in the weeks to come to help borrowers survive the rate hikes,” she said.

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