Jail break: Westpac slashes stress test for select borrowers in mortgage prison

The Westpac Group has today announced it will be lowering the stress test on select refinance applications in a bid to help borrowers out of mortgage prison.

Banks typically stress test a borrower’s finances to make sure they can still afford the mortgage repayments if rates rose by 3 percentage points above the rate they are applying for, even if the application is a refinance.

As a result, some borrowers are finding they can’t refinance to a cheaper lender because they don’t pass the new bank’s serviceability test at higher rates. 

From Monday, select refinancers who do not pass the banking group’s standard serviceability test can 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.

This applies to select refinance applications with Westpac and its subsidiaries, St George, Bank of Melbourne and BankSA.

However, to be eligible for Westpac’s new “Streamlined Refinance” customers will need a good track record of paying down all existing debts in the last 12 months and credit score of over 650, among other criteria. 

Borrowers must 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.

APRA’s serviceability guidance does not prevent banks from approving mortgages outside of their standard parameters, although these applications are expected to be exceptions rather than the rule. Non-bank lenders are not subject to these guidelines.

The latest APRA Quarterly Property Exposure Statistics for the December 2022 quarter show just 3.1 per cent of all new loans from the banks were approved outside their standard serviceability policies. In dollar terms this is $4.66 billion worth of new home loans (including refinancers).

APRA should consider lowering the stress test for all refinancers

RateCity.com.au believes Australia’s banking regulator, APRA, should consider officially lowering the serviceability buffer for refinancers.

The current buffer of 3 percentage points helps ensure new borrowers don’t take out excessive debts compared to their incomes. 

However, the test is locking some existing borrowers into mortgage prison. 

These are often households that borrowed at or near capacity when rates were at record lows and the APRA stress test was at 2.5 per cent. Yet it is these borrowers that are likely to need rate relief more than ever to help stay afloat.

While different stress tests for new and existing borrowers would be more complicated for the banks to implement, enabling people in mortgage prison to refinance could potentially help prevent some from defaulting on their loan.

While people in mortgage prison can still negotiate with their current lender for a rate cut, often the biggest savings are made by refinancing to a lower cost lender on a new customer rate.

In February of this year APRA announced it would keep the 3 per cent buffer in place for now, but that it was not “set in stone” should risks to financial stability change.

Potential home loan stress test rate under different serviceability buffers

Source: RateCity.com.au. Big four basic rate is an average of each bank’s ongoing variable rate with a 20% deposit. 

How much relief can refinancing bring?

RateCity.com.au analysis shows a single person on the average wage, who borrowed at capacity two years ago on a big four bank basic variable rate with a 20 per cent deposit is currently paying a rate of 6.44 per cent, assuming they haven’t re-negotiated their loan in this time.

By refinancing to Westpac’s lowest variable rate (5.59% for the first two years, then +0.40% pts thereafter), the borrower could potentially see their rate drop by 0.85 percentage points and their monthly repayments drop by $355. 

Over the next two years, they could potentially save almost $14,000 once switch fees and cashback is factored in.

Customers could potentially see an even bigger drop to their monthly repayments by refinancing to a lower rate.

However, under the standard serviceability tests, this borrower is unlikely to be able to refinance unless they have had a higher-than-normal pay rise in this time. 

Potential impact of refinancing for a borrower on the average wage who bought 2 years ago 

Based on an owner-occupier paying principal and interest with a $664,955 debt remaining

Source: RateCity.com.au. Notes: assumes person was on the average ordinary full -time wage as recorded by the ABS. Assumes cash rate increases in line with ANZ’s forecast. 

RateCity.com.au research director, Sally Tindall, said: “Westpac is pulling down the barricade for borrowers in mortgage prison who don’t pass the banks’ serviceability tests at higher rates.”

“This is a strategic move from Australia’s second largest lender. While many of these potential new customers are feeling the heat from the rate hikes, the bank has a range of checks in place to make sure it is lending responsibly,” she said.

“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.

“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.

“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,” she said.

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