One of Australia’s big four banks makes major changes to lending as mortgage cliff looms for up to 900,000 homeowners
- Westpac lowers its ‘stress test’ for refinanciers
- Up to 900,000 Aussies come from low flat rates
Westpac will lower the stress test for homeowners looking to refinance to help borrowers avoid a “mortgage prison.”
Nearly 900,000 Australians who obtained record low interest rates on a fixed-term mortgage during the Covid-19 pandemic will have come off interest rates and will face significantly higher interest levels on their new repayments.
Making matters worse, some who want to refinance their loan with a new bank in the hopes of a lower interest rate find themselves stuck where they are because they can’t pass a financial stress test.
In the standard test, a bank checks a borrower’s finances to make sure they can still pay back if interest rates rise 3 percent more than the rate at which they are currently willing to borrow.
Starting next week, Westpac will allow some people seeking to refinance their mortgage to be tested under a “modified maintenance rate” if they fail the standard maintainability test.
Starting next week, Westpac will allow some people seeking to refinance their mortgage to be tested under a ‘modified maintenance rate’ if they fail the standard maintainability test
To qualify, customers must have a credit score above 650 and a good record of paying off all existing debt within the past 12 months.
The move has been praised by RateCity, which has called on the banking regulator to lower the rating rate for people looking to refinance existing loans.
“The current 3 percentage point buffer helps ensure that new borrowers do not take on excessive debt relative to their income,” reads a statement from the financial comparison website.
However, the test locks some existing borrowers into mortgage prison.
“These are often households that borrowed at or near capacity when interest rates were at all-time lows and the APRA stress test was at 2.5 percent. Yet it is these borrowers who probably need rate cuts more than ever to stay afloat.
“While different stress tests for new and existing borrowers would be more complicated for the banks to implement, refinancing people in mortgage jail could potentially help some avoid defaulting on their loan.”
Data from the Reserve Bank of Australia in April projected that about 880,000 Australians who had their mortgages locked when interest rates were at historic lows would have come off interest rates by the end of 2023 and face massive increases by the end of 2023 of the interest payments on their loans.
Data from the Reserve Bank of Australia in April predicted that about 880,000 Australians who had their mortgages locked when interest rates were at historic lows would have moved away from rates by the end of 2023 and faced massive increases by the end of 2023 of the interest payments on their loans (photo, RBA Governor Philip Lowe)
Research director Sally Tindall said Westpac’s decision was a “strategic move” to bring in new customers while still complying with responsible lending practices.
She also called on APRA to lower its stress test, saying many Australians who borrowed at capacity when interest rates were historically low were now struggling with skyrocketing repayments.
“It seems ridiculous to keep these borrowers locked up in a mortgage prison when a decent rate cut could be enough to help them stay afloat,” she said.
“These borrowers have already signed off on the debt — the damage is done. They now need a way to minimize the impact, and it’s important to have a range of lenders to choose from.”