- Policy revamp to make loan application requirements less strict
- Lenders have lowered serviceability buffer
- All overtime income and allowances to be included in assessments
The Reserve Bank of Australia (RBA) announced another cash rate hike earlier this month, the 12th hike in 14 months, which puts the official cash rate at 4.10%. The challenge continues to mount for many prospective Australian home buyers looking to get a foothold in a housing market where inflation is at an all-time high, and house prices and rents are steadily climbing with no end in sight.
Borrowers paying off their mortgages will be hit hardest, with the cash rate target having doubled from 2.7% to 5.4% since the RBA started increasing them. A person servicing a $500,000 mortgage must now pay about $1100 more monthly. Mortgage prisoners, unable to refinance their mortgage and struggling to make payments, will find no reprieve here.
Hope in a time of crisis
Financial comparison site Canstar has revealed that there may be a silver lining for borrowers, as lenders adjust their policies to the poor market conditions to make refinancing and securing a loan less daunting.
Several lenders have lowered borrowers’ financial stress test requirements, excluding certain living expenses, forgoing notional rent for Australians living in rent-free accommodation, and accounting for all overtime income.
“Competition among lenders to offer low rates may be cooling but lending policies are sharpening up. So, whether you’re looking to refinance or get a new loan, it may now be easier to get your application across the line,” says Effie Zahos, Canstar’s Editor-at-Large and money expert.
“A number of lenders have made changes to their policies that could help some borrowers escape mortgage prison and others gain approval for a loan that had previously hit roadblocks.”
“These lenders aren’t taking on more risk, they are adapting their policies to accommodate what is an unprecedented time. In some cases, it could be as simple as recognising the workforce has changed and that in some industries, overtime income is stable income that should be fully included when assessing a loan application.”
“Lenders who are making these types of changes will gain a competitive edge.”
Lowered serviceability buffer
Lenders must place a serviceability buffer atop advertised interest rates before evaluating loan applications. The Australian Prudential Regulatory Authority (APRA) currently dictates the serviceability buffer, which sits at 3%.
A serviceability buffer allows banks to ensure prospective borrowers can repay their loans even if interest rates rise. This means that if an applicant applies for a loan at an advertised rate of 4%, they will be assessed on their ability to repay loans at 7%.
However, Zahos asserts that the serviceability buffer, implemented to shield consumers from rate hikes, has done more harm than good.
“It has made it harder for some borrowers to refinance to a lower rate loan resulting in them being stuck in a ‘mortgage prison’. This has been a big gripe of mine and I’m glad to see some lenders are taking action,” said Zahos.
Canstar highlighted some examples of change, including Resimac, which lowered its serviceability assessment buffer to 2.00% for all products.
Another example included Westpac, and its subsidiaries, which have proposed a “modified Serviceability Assessment Rate”, giving borrowers who fail the standard stress test another chance at refinancing their home loan. To be eligible, customers must have a credit score of at least 650, have a stellar history of paying off debates in the past 12 months, and the new monthly repayments need to be smaller than on their present loan.
Including all overtime income and allowances in applications
Zahos states that lenders usually only assess 80% of a borrower’s overtime pay in a loan application. This places essential workers like firefighters, police officers, and nurses, who derive large sums of their income from overtime, penalties, and allowances, at a significant disadvantage.
Recognising this issue, some lenders, including Westpac, Bank of Queensland, Macquarie Bank, Ubank and Bankwest. are now allowing emergency services employees to include all overtime and allowances in their home loan applications for a fairer assessment of their income.
Further changes to the assessment
Among other changes highlighted by Canstar, Bankwest now allows self-employed borrowers to give one year’s worth of financial statements or tax returns in their applications, down from the two-year requirement. Initially, a child’s private school tuition fees were counted as part of an individual’s living expenses, possibly lowering the amount one could borrow.
Macquarie Bank has amended its policy to exclude private school fees from living expenses if the applicant possesses enough savings to pay for the tuition. The banks considered applicants living rent-free with their parents to be spending a notional, imaginary rent of about $650 a month, harming their borrowing capacity.
Macquarie Bank will overlook notional rent for singles without dependants who provide evidence from their parents that they live rent-free. This benefits individuals who borrow to rent the property they purchase while living at home with their parents.
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