The great mortgage jailbreak

Bruce Brammall, The West Australian, 6 June, 2023

Australia’s rapidly growing “mortgage prisoner” population, who have felt the noose tightening around their necks, could soon be handed a major reprieve.

Hundreds of thousands of borrowers have been trapped with their current lender because of stubbornly rigid refinancing rules, which has stopped them from getting cheaper rates with an alternative provider.

The change being adopted by some lenders could also benefit tens of thousands whose low fixed-interest rate loans have recently expired, or will expire by year’s end.

Several major lenders, including some of Australia’s largest banks, have adjusted their internal credit calculators for refinancing loans to acknowledge many borrowers, who can afford to meet their current repayments, should be able to switch lenders to access lower rates.

In essence, these lenders, under the regulator’s watchful eye, are reducing APRA’s mandated 3 per cent “servicing buffer” to 1 per cent. This would allow many Australian borrowers to escape current lenders to new providers to access lower rates.

The lower servicing buffer would only be available to borrowers in limited circumstances. More on criteria shortly.

Stuck on you

Borrowers wanting to switch to lenders with lower rates have often found they are unable to, because when the new bank runs mandatory affordability calculators, borrowers would fail if rates were to rise 3 per cent from current levels.

This 3 per cent is known as the “servicing buffer”. It is a requirement set by APRA and is added to the loan rate on offer to the customer for the purpose of deciding if the borrower can afford the loan not just at the current rate, but if interest rates were to rise by 3 per cent.

The term “mortgage prisoners” refers to borrowers who are stuck with their current lender because while they can meet their current repayments, they are rejected by a new lender because the fail the 3 per cent buffer, leaving them unable to move to a lender for a better rate.

Let’s take a borrower with $700,000 worth of debt. Their bank, Bank ABC, is charging them 6.3 per cent, with a minimum mortgage repayment of $4333 a month.

Another bank, XYZ Bank, is offering a loan of 5.7 per cent, with a minimum repayment of $4063, lower by $270 a month.

However, due to APRA’s 3 per cent servicing buffer, XYZ Bank must test them at 8.7 per cent, and a monthly repayment of $5482.

If they can afford the current $4333, and therefore the lower repayment of $4063, they are considered “mortgage prisoners” if can’t hit the 3 per cent-loaded servicing buffer at XYZ Bank of $5482.

Rethinking rules

Lenders (currently including Westpac, ANZ and Liberty) are re-reading their regulators’ rulebooks and are now offering to use a 1 per cent servicing buffer for refinance-only loans, where strict criteria are met.

This would include being up-to-date with repayments for the last 12 months, where they will access lower repayments and where there have been no adverse changes to the consumer’s financial circumstances.

The loan amount cannot be increased through the new loan, nor can the loan term be extended from when the current loan was due to be paid out (to reduce repayments).

Borrowers who have missed repayments, taken on an extra credit card to help with meeting household costs, or would need lenders’ mortgage insurance for the new loan, are unlikely to be eligible.

Wider borrower benefits

While only adopted by a small number of lenders so far, the change is likely to spread to competitors keen not to lose existing customers.

That could lead to broader benefits, particularly for borrowers soon coming off low fixed-rate loans. If there is refinancing pressure coming from competitors, a borrower’s current lender is likely to “sharpen their pencil” on the new variable rate loan they are rolling off to, to try to stop their customer refinancing elsewhere. (More profitable to keep an existing customer than to find a new one.)

Westpac have already promised mortgage brokers at recent seminars that they will automatically offer those borrowers the bank’s best available rates when they finish their fixed rate terms, without pressure from customers or brokers.

Stay tuned

For understable reasons, these developments go against what has largely been published in the media, and you might have heard from your bank or mortgage broker, in the last year, because lenders have had to carefully negotiate APRA’s servicing rules.

But the good new is, the noose for mortgage prisoners is loosening. Doors that were closed are opening. If you feel you’re trapped, or been told you were, it’s time to reopen conversations, now or in the near future, with your bank or mortgage broker.

Bruce Brammall is the author of Mortgages Made Easy and is both a financial adviser and mortgage broker. E: bruce@brucebrammallfinancial.com.au.