Melbourne-based research scientist Wes Webster and his wife should be feeling excited with a baby boy on the way to join their young daughter, and settling into a house of their own.
Instead, he’s had to cancel his private health insurance, downgrade his car insurance, and cut back on discretionary spending like eating out in order to build a financial buffer for later this year, when his home loan’s fixed-rate term will end.
Mr Webster expects his family will go from paying $13,000 per year in interest to $43,000 per year when the term is up.
After the first three interest rate hikes, when it became clear rates would only go higher, Mr Webster attempted to refinance to lock in a lower rate for a couple more years.
But he was unable to do so as the family had bought their home with help of the First Home Guarantee scheme, which allows participants to buy properties with low deposits with the federal government acting as guarantor.
The Websters paid a 10 per cent deposit, with the government guaranteeing another 10 per cent, but their options for refinancing with a new lender are now more limited, thanks to participating in the scheme.
“We feel that we’re pretty trapped, not only with the loan conditions that we’ve got, but with interest rate rises and having a baby on the way,” he said.
“We considered moving in with our parents back in the country and leasing this house, but you can’t do that unless you’ve paid back 20 per cent of the principal on your home to essentially release the government [of] their obligation.”
Thousands in potential savings
Near-record numbers of households have refinanced home loans this year, but while the Webster family has been unable to switch, some borrowers have also found themselves locked in a “mortgage prison” because they can’t pass refinance stress tests.
RateCity analysis shows an owner-occupier with a $664,955 debt could save more than $10,000 per year if they refinanced from Westpac’s revert rate of 6.44 per cent following the end of their fixed-term down to a rate of 5.59 per cent.
When applying for a new home loan or refinancing, banks stress test your loan to make sure you can afford to make repayments even if interest rates rise to a certain level.
Effie Zahos, Canstar editor-at-large, said while this test serves an important purpose to make sure borrowers don’t bite off more than they can chew with new loans, it doesn’t make sense to test refinancing borrowers with rates currently so high.
“[If] you’re meeting your repayments at 6 per cent, [and] it’s stressful and you found a cheaper loan at 5 per cent, but then when you put that 3 per cent buffer on top, you may find that you cannot afford it,” she said.
“The serviceability buffer is preventing you from refinancing, so it doesn’t make sense.
“Common sense has to apply. If a person can afford their loan at a higher rate, and they want to refinance to a lower rate, it is absurd to say … the serviceability is holding you back.”
Calls to lower buffer
The Australian Prudential Regulation Authority (APRA) has so far resisted calls from advocates to lower Australia’s official minimum serviceability buffer from 3 per cent for refinancers.
Instead, Westpac took the lead earlier this month, announcing select refinancers who fail the bank’s standard serviceability test can be re-tested using a ‘modified Serviceability Assessment Rate’.
This applies to select refinance applications with Westpac and its subsidiaries (St George, Bank of Melbourne and BankSA), but to be eligible, customers will need a track record of paying debts on time and a credit score of over 650, and must be refinancing to a loan with lower monthly repayments than their existing one.
Sally Tindall, RateCity research director, praised Westpac’s move, but said APRA should lower the serviceability buffer across the board to offer borrowers more lender options.
“APRA’s 3 per cent buffer helps prevent people from taking out new loans where they’ll be saddled with giant debts compared to their incomes, that can hang over their heads for years, if not decades, to come,” she said.
“But for refinancers, the damage is done.
“If people are already in the system, [if] they already have committed to the large amounts of debt, reducing the buffer for refinancers will help at least some of those people find some relief by switching lenders and moving to a lower rate.”
