Lenders begin tweaking serviceability buffers

As of today (22 May), Westpac has brought in a new Streamlined Refinance policy, designed to help more customers refinance their existing home loans to Westpac.

While applications to refinance an existing consumer mortgage will continue to be assessed under standard serviceability criteria and document verification requirements, Westpac has said that if certain customers are unable to meet serviceability under the standard assessment criteria, a “modified Serviceability Assessment Rate” may be applied.

This rate would be applied as a credit exception to new and existing consumer mortgage commitments.

Currently, the prudential regulator expects banks to test new borrowers’ ability to meet their loan repayments at an interest rate that is at least 3.0 percentage points above the loan product rate.

However, Westpac’s Streamlined Refinance policy (which still applies the standard floor rate) could be applied to customers who meet certain eligibility criteria and have “a proven track record of servicing their existing loan commitments”.

To be eligible for Streamlined Refinance, Westpac said customers must meet all of the following criteria:

• The new mortgage monthly repayment (unbuffered) must be less than or equal to the current minimum monthly contracted repayment on the loan being refinanced.
• The applicant’s credit score must be ≥650 (for all applicants).
• The new loan must be for principal & interest (P&I) repayments.
• The borrower must declare that they have no foreseeable material or adverse changes to their ability to repay the loan.
• There cannot have been any arrears or hardship reported in the last 12 months.
• All open liabilities on consumer scores must not have any numeric values other than ‘0’ reported in the last 12 months (though Ps [pending] and Rs [not reported] are acceptable).
• Consumer mortgages being refinanced must be opened for at least 12 months, with between 10 and 12 0’s reported.
• Other commitments (i.e. credit cards & personal loans) and consumers’ mortgages not being refinanced, must have between 3 and 12 0’s reported in the last 12 months.
• The new loan limit must not be more than $50,000 higher than the limit of the loan(s) being refinanced.

Westpac emphasised that the Streamlined Refinance policy would not be available for those making interest-only repayments, for those using a guarantor, for those consolidating debt, or to refinance a portfolio of loans, among other exclusions.

The move by the big four bank comes after other lenders, including non-bank lender Resimac (which is not beholden to APRA’s buffer), have reduced their serviceability tests.

Resimac reduced its serviceability assessment buffer to 2.00 per cent per annum for all products.

This means the stressed assessment rate for all products is the higher of:

• Either the actual rate plus a 2.00 per cent per annum loading
• A floor assessment rate of 5.75 per cent per annum

Why are lenders reducing their buffers?

In February of this year, the Australian Prudential Regulation Authority (APRA) announced that the current 3 per cent buffer was “appropriate” and would not be tweaked, despite some calls for it to be reduced as serviceabilty tightens and borrowers look to refinance in record numbers.

As such, borrowers who may want to take out a variable rate loan of around 5.5 per cent, for example, would be assessed on the basis of being able to afford repayments at 8.5 per cent.

Several industry participants — including brokers, lenders, association heads, and politicians — have recently warned that this serviceability test is too high and is resulting in borrowers being ‘stuck’ in mortgages that might not be in their best interests.

Speaking earlier this year, the Finance Brokers Association of Australia’s (FBAA) managing director Peter White AM stated this buffer means that many borrowers who can afford the interest rate of the day, or even a little higher, are being unfairly prevented from refinancing.

“More borrowers are becoming ‘mortgage prisoners’, locked into a situation where they can’t access a better deal because they don’t meet the inflated assessment rate,” Mr White said earlier this year.

“A 3 per cent buffer was appropriate in the past because interest rates were at an all-time low and were always going to rise significantly, and this protected both the banks and the borrowers, but we can’t live in the past and a buffer of 1.5–2 per cent is far more appropriate today and in the near future.”

Similarly, Ryan Gair, the chief executive of mortgage manager Rate Money, has said that the removal of the APRA buffer would put consumers in a better financial position in the long term, while recognising that existing borrowers have already proven their ability to service loans and allowing them to save by refinancing to a loan with a lower rate.

“The significant savings would see them pocket more cash over time,” he told The Adviser earlier this year.

“Home loan buffers made sense during the last few years when we had record-low interest rates. They acted as a contingency for lenders to ensure borrowers could repay their loan.

“APRA should have separate recommendations to regulate existing borrowers: they should allow those looking to refinance to simply show that they can meet the repayments along the same lines as applying for a new loan, and that your current income can still service the repayments.”

[Related: Home Guarantee spots remain vacant amid serviceability crunch]