Home loan refinancing hits new high - what are your options?

In recent weeks, Westpac and the Commonwealth Bank of Australia (CBA) have reduced their mortgage serviceability buffers to assist borrowers wanting to refinance and switch lenders.

The Australian Prudential Regulatory Authority (APRA) guidelines require authorised deposit-taking institution’s (ADIs) to stress test all new residential mortgage applications - including refinancers - at a rate of 3% above the rate they applied for, to ensure that the borrower will be able to afford their repayments.

However, in May, Westpac began allowing select refinancers who didn’t meet the bank’s standard serviceability test to apply for a lower, modified serviceability assessment rate, provided that it exceeds the bank’s floor rate.

In order to be eligible, customers need a credit score of more than 650 and a solid track record of repaying all existing debts over the last 12 months. Borrowers must also be refinancing to a loan that has lower monthly repayments than their existing mortgage.

CBA followed suit last month, reducing its serviceability buffer from 3% to 1% for qualifying customers. These moves may encourage the remaining big four banks, ANZ and NAB, to implement a similar policy.

APRA released a statement explaining that they're aware that some banks have recently made changes to their exceptions processes to support borrowers facing challenges refinancing with another lender. An “exception to policy” occurs when a bank approves a loan that doesn't meet standard loan criteria, such as serviceability buffers. 

"Under APRA’s prudential framework, banks can use exceptions to policy if these are managed prudently and limited. This approach allows banks to take into account additional indicators of repayment capacity beyond those captured in the standard serviceability test. For a borrower seeking to refinance, this could include past repayment behaviour," according to the statement.

How did things work before the RBA’s rate hike cycle?

Previously, APRA had required banks to have a minimum interest rate floor of 7%. This meant that any new home loan customer would have to be assessed at a serviceability rate of at least 7% before being approved.

When the Reserve Bank of Australia (RBA) began slashing the cash rate from mid-2019, the serviceability floor of 7% was removed entirely. With interest rates nearly at 0%, this essentially allowed the banks to review and set their own approval margins.

Now that the cash rate has soared to 4.10% in just over a year, the minimum interest rate floor, although not enforced, has almost returned organically. Average home loan interest rates among the big four banks rose to 6.86% in June.

Comparing your refinancing options can potentially help you to switch to a home loan with a reduced interest rate, cheaper monthly repayments and more desirable mortgage features.

Check out the tables below for some of the lowest rates listed on RateCity, covering a range of different homebuyers.

Owner occupied variable rate home loans:

Investor variable rate home loans:

Owner occupied fixed-rate home loans:

Investor fixed-rate home loans:

Source: All rates listed above are available on RateCity.com.au, and are accurate as of 05/07/2023.

Economic factors such as inflation, the cost of living, and rising interest rates could see Australians at higher risk of “mortgage prison”, where they’re unable to refinance their home loans.

Being in mortgage prison can make it costly to switch lenders, as you are likely to have to pay Lender’s Mortgage Insurance (LMI), which can climb into the tens of thousands of dollars. Those most at risk of mortgage prison are:

• Borrowers who purchased at the peak of property prices in their area; and
• Borrowers with small deposits, such as first home buyers.

“While some people who borrowed at capacity may find themselves with limited options when they come off their fixed rate, CBA and Westpac’s lowering of the stress test for select refinancers has opened up the possibility of them now being able to refinance,” according to RateCity research director Sally Tindal.

“With the potential for up to three more rate hikes still to come, more banks will hopefully revisit their servicing policies for refinancers stuck in mortgage prison.”

The best actions to take in response to potential changes to lending rules, rising interest rates and declining property values will depend on your household’s financial position and your goals. A few general tips to consider include:

• Ascertain your home’s equity - get a free property report to estimate your current home value
• Compare a range of different home loans if you’re eligible to refinance
• Try making extra repayments and/or using offset accounts to build your own mortgage buffer
• Check your credit score to see where you stand
• Consider contacting a mortgage broker for advice that’s more specific to your financial situation