Bank’s big move as mortgage cliff looms

AUSTRALIA - NewsWire Photos - General view editorial generic stock photo of Australian cash money currency. Picture: NCA NewsWire / Nicholas Eagar
Westpac will allow some new customers looking to refinance to be tested at a lower level than the standard of three per cent. Picture: NCA NewsWire / Nicholas Eagar

Westpac will lower the stress test for homeowners looking to refinance in a bid to help borrowers avoid “mortgage prison”.

Nearly 900,000 Australians who secured record low interest rates on a fixed term mortgage during the Covid-19 pandemic will have come off the rate and face significantly higher levels of interest on their new repayments.

Making matters worse, some looking to refinance their loan with a new bank in the hope of a lower interest rate are finding they are trapped where they are, as they cannot pass a financial stress test.

Under the standard test, a bank checks a borrower’s finances to ensure they would still be able to make repayments if interest rates rose by 3 per cent more than the rate they are currently looking to borrow at.

From next week, Westpac will allow some people looking to refinance their mortgage to be tested under a “modified Serviceability Assessment Rate” if they do not pass the standard serviceability test.

Westpac has announced a huge change for new customers looking to refinance that could save some people thousands. Picture: NCA NewsWire / Morgan Sette

To be eligible, customers must have a credit score of more than 650 and a good track record of paying down all existing debts over the last 12 months.

The move has been lauded by RateCity, which has called on the banking regulator to lower the assessment rate for people looking to refinance existing loans.

“The current buffer of 3 percentage points helps ensure new borrowers don’t take out excessive debts compared to their incomes,” a statement from the financial comparison website reads.

“However, the test is locking some existing borrowers into mortgage prison.

“These are often households that borrowed at or near capacity when rates were at record lows and the APRA stress test was at 2.5 per cent. Yet it is these borrowers that are likely to need rate relief more than ever to help stay afloat.

“While different stress tests for new and existing borrowers would be more complicated for the banks to implement, enabling people in mortgage prison to refinance could potentially help prevent some from defaulting on their loan.”

Data from the Reserve Bank of Australia in April predicted about 880,000 Australians who had fixed their mortgage when interest rates were at record lows would have come off the rate and faced huge increases to the interest payments on their loans by the end of 2023.

The RBA has lifted the cash rate 11 times in 12 months, sparking a huge rise in interest rates. Picture: NCA NewsWire / Gary Ramage

Research director Sally Tindall said Westpac’s decision was a “strategic move” to help bring in new customers and still adhere to responsible lending practices.

She also called on APRA to lower the stress test, saying many Australians who borrowed at capacity when interest rates were at record lows were now struggling with spiking repayments.

“It seems ridiculous to keep these borrowers locked up in mortgage prison when a decent rate cut could be enough to help them stay afloat,” she said.

“These borrowers have already signed up to the debt – the damage is done. Giving them a way to minimise the fallout is what they now need, and it’s important to have a range of lenders they can choose from.”