Traditionally, banks subject borrowers to stress tests to ensure they can comfortably afford mortgage repayments if interest rates were to increase by three percentage points above the applied rate.
- From this week, Westpac will lower its stress test on some (eligible) refinance applications in a bid to help borrowers avoid a 'mortgage prison.'
- To be eligible, customers must have a credit score over 650 and a good track record of paying down all existing debt over the last 12 months, amongst other specified criteria.
So for instance, a variable-rate of 5.50% would be stress tested under a serviceability of 8.50%.
As a result, this has posed a challenge for some borrowers looking to refinance with a more affordable lender as they don’t pass the new bank’s serviceability test at higher rates.
This is where Westpac’s new refinancing policy comes into play.
From this week, Westpac will allow select refinancers who do not meet the bank’s standard serviceability test to undergo a “modified Serviceability Assessment Rate,” provided it exceeds the bank’s floor rate.
To be eligible for Westpac’s new “Streamlined Refinance,” customers must have a credit score of more than 650 and a good track record of paying down all existing debts in the last 12 months.
Borrowers must also be refinancing to a loan that has lower monthly repayments than their existing one.
CEO and Co-founder of WLTH Brodie Haupt said Westpac’s decision to reduce its stress test is a welcome move, yet there could be wider implications that need to be considered.
“Westpac’s decision may set a precedent, leading to increased competition among banks and lenders in refinancing,” Mr Haupt told Savings.com.au.
“This could benefit borrowers struggling with high mortgage rates. However if stress tests become more lenient, APRA may review its rules to maintain market stability.
“This could affect the maximum loan amount that borrowers can qualify for, meaning lenders may apply stricter criteria when assessing loan affordability, resulting in some individuals being declined for their desired loan amount.”
Even if you are eligible for Westpac’s new policy, Mr Haupt recommends shopping around and comparing other rates on the market that may offer a better deal.
Home loans involving interest-only terms, debt consolidation, or lender’s mortgage insurance (LMI) do not qualify for this offering.
The new adjustment applies to refinance applications within Westpac and its subsidiaries including St George, Bank of Melbourne, and BankSA.
Since November 2021, lenders have been required to assess a borrower’s ability to cope with a 3% point rise in variable mortgage rates, under APRA’s rules.
With over 880,000 ultra-low fixed-rate loans set to expire by the end of 2023, that means many borrowers could find themselves locked in a ‘mortgage prison’.
The RBA raised the cash rate by another 25 basis points this month, marking 375 basis points' worth of increases since this time last year.
This means fixed-rate borrowers would go from an average interest rate of 1.95% p.a. to well over 5% p.a. - including the 3% stress test this would go up to 8%.
In February this year, APRA announced it would keep the 3% buffer in place for now, but that it was not “set in stone” should risks to financial instability change.
"Westpac slashes stress test on eligible refinance applications" was originally published on Savings.com.au and was republished with permission.