Buffer changes benefit 3 in 10 mortgage prisoners

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.

For example, a borrower looking to take out a loan of 6.3 per cent would need to be able to service the loan at 9.3 per cent that few borrowers are able to do in a cost-of-living crisis.

Indeed, previous data from the Lendi Group had found that around 15 per cent of Australian first home buyers (FHBs) rolling off their low fixed-rate periods could become ‘mortgage prisoners’ in the near future, as they have high loan-to-value ratios (LVRs) and may find it difficult to refinance.

However, in a bid to help more borrowers refinance, some lenders have been announcing exceptions to their credit policies for some borrowers (most eligible borrowers would need a credit score over 650 and no arrears or hardship in the last 12 months to qualify for the reduced buffer).

After analysing data from the Lendi platform (used by over 1,200 brokers operating under the brokerage brands Lendi and Aussie), the Lendi Group found that around 30 per cent of mortgage prisoners could now qualify to refinance, potentially saving over $700 a month or $9,000 per year as a result.

Moreover, the group flagged that it could result in fewer Australians needing to take on a longer loan term to secure a better deal (with Lendi Group data showing that 51 per cent of those who refinanced in the last month extended their loan term).

Travis Tyler, chief product officer at Lendi Group commented: “A 3 per cent serviceability buffer on a 5 per cent interest rate is impossible for many home owners to meet.

“Currently, a mortgage holder with the average Australian mortgage of $600,000 (based on national figures) at a 5 per cent interest rate, would be assessed on whether they could afford repayments at 8 per cent or $4,630 per month.

“In contrast, a serviceability test at 6 per cent, which some lenders are offering, would bring that test down $3,685 a month, therefore being serviced at 20 per cent less, or a $765 difference per month, based on a 25-year loan term.”

He flagged that the group’s mortgage brokers are already re-engaging with customers who may have previously been “locked out of better rates” to see if they can find them a fit with a lender that is offering “a potential lifeline” to those refinancing.

“By dropping the buffer and unlocking an additional 20 per cent in borrowing capacity, brokers are helping these eligible Australians search for a lower rate than the one they are currently paying,” he said.

Mr Tyler added that mortgage prisoners could benefit by speaking to brokers to find out their options, noting that it is “increasingly difficult to do this on your own”.

APRA warns banks about lending exceptions usage

With a growing number of lenders having begun offering lending exceptions for those looking to refinance, the prudential regulator has now written to banks to remind them of their obligations and warn them that those with higher volumes of lending exceptions will be faced with “heightened supervisory attention”.

The chair of the Australian Prudential Regulation Authority (APRA), John Lonsdale, noted that some banks have recently announced changes to their exception processes to support borrowers who may be experiencing challenges but said that “it is important that these changes are implemented prudently”.

“APRA is aware that some banks have recently made changes to their exceptions processes to support borrowers who may be facing challenges in refinancing with another lender,” the letter read.

“APRA requires banks to have prudent policies and processes for dealing with exceptions to policy. Large volumes of exceptions can create risks by weakening banks’ risk profiles and increasing the vulnerability of their loan books to future shocks,” noting that serviceability policy exceptions have historically accounted for between 2 and 3 per cent of the banks’ total housing lending.

“It is important that exceptions are used in a prudent and limited manner, so as not to undermine the intent of the core policy. In using exceptions, APRA expects banks to make a prudent assessment of repayment capacity so that there is a good outcome for borrowers and the financial system.”

The APRA chair said that the regulator would be “monitoring exceptions trends closely and may request additional information to assess how banks are managing risks”.

“Banks reporting large volumes of policy exceptions will be subject to heightened supervisory attention,” he concluded.

[Related: AFG to enable brokers to recommend loans with 1% buffer]