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In the face of persistent pandemic-related challenges and rigorous serviceability criteria, refinancing has become an increasingly arduous process for borrowers.
While some lenders are beginning to accommodate serviceability exceptions, by lowering their buffers, the ongoing repercussions of the pandemic continue to hamper customers’ ability to service their home loans, locking many into ‘mortgage prisoners’.
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Analysis from the May 2023 Broker Pulse survey by Momentum Intelligence found that almost every broker respondent has had a client who has not been able to refinance to another loan due to serviceability issues.
Speaking to The Adviser, mortgage broker Greg Hearn of Greg Hearn Financial Solutions shed light on the lingering effects of the pandemic, indicating that businesses’ ability to meet serviceability requirements has been severely affected.
Mr Hearn explained while some borrowers manage to meet serviceability requirements, the extended disruption caused by the pandemic has left a substantial portion struggling to meet the criteria.
“A lot of these people have perfect conduct on their loan but they don’t have the figures to back it up,” Mr Hearn said.
Despite calls for the Australian Prudential Regulation Authority (APRA) to lower its serviceability buffer, the regulator has maintained it at a steadfast 3 per cent.
Consequently, the combined effect of the serviceability requirement and a cash rate of 4.1 per cent continues to impede borrowers from making switches in their mortgage arrangements. Borrowers must now demonstrate their capability to handle repayments at approximately 8–9 per cent.
Mr Hearn explained that one event management client demonstrated exceptional performance in 2023, but the residual impact of pandemic-related overheads in 2022 undermined their eligibility for refinancing.
However, the client managed to secure financing based on just one year of figures, deviating from the usual requirement of multiple years.
Highlighting the case of another client where the pandemic prevented them from maintaining staff in their business for almost two years, Mr Hearn remarks that their “finances didn’t stack up for serviceability”.
However, the clients’ good conduct played a significant role in their ability to secure refinancing, a crucial aspect, Mr Hearn cautioned, especially when navigating the challenges of refinancing with reduced serviceability buffers.
As a growing number of borrowers find themselves unable to meet these stringent criteria, numerous lenders have begun reducing buffers for specific borrower categories.
Among major banks, ANZ remains the sole institution not to adjust its serviceability buffers. However, Westpac, National Australia Bank (NAB), and Commonwealth Bank of Australia (CBA) have all modified their requirements for eligible borrowers, especially those with sound credit histories.
For borrowers with less-than-perfect credit histories, meeting these criteria has proven to be another setback.
Mr Hearn said that in cases where a borrower has missed a payment due to rising interest rates or financial constraints, refinancing becomes nearly impossible.
“That’s one of those things you have to have to qualify for, for these lower buffer refinances,” Mr Hearn said.
In light of this, recent data from the personal finance marketplace Compare Club showed in less than six months, the percentage of home owners grappling with these challenges has surged from 15 per cent to a staggering 30 per cent.
[Related: Hit the buffers]
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