In the past year, mortgage holders have faced a barrage of challenges that demand careful attention and strategic planning. Economic turbulence, interest rate fluctuations, and the lingering impacts of the global pandemic have left many Australians grappling with unprecedented interest rate rises, putting immense pressure on cashflow and household disposable income. Refinancing a home loan, once a flexible option for homeowners, has become increasingly challenging. Borrowers find themselves trapped in metaphorical "Mortgage Prisons," locked into high-rate variable mortgages with no escape in sight. But don't lose hope just yet! There's a glimmer of light on the horizon, and it comes in the form of "Streamlined Refinances."
Mortgage Refinancing – Then & Now
Traditionally, mortgage refinancing provided homeowners with the freedom to adjust their financial journey as circumstances changed. Whether it was securing a competitive interest rate, adjusting the loan term, or accessing built-up equity, homeowners had options. However, banks have started subjecting borrowers to stress tests to ensure they can handle potential interest rate increases. This stress test involves assessing borrowers on "buffered" monthly repayments, which are calculated by adding three percentage points to the applied interest rate. As interest rates have climbed, meeting the repayment criteria set by banks has become increasingly difficult.
Example 1: $500,000 Variable Principal & Interest Home Loan over 30 years
Interest Rate | Actual Monthly Repayments | Buffered Assessment Repayments |
4% | $2,387.08 | $3,326.51 |
6% | $2,997.50 | $4,023.11 |
In the first example, with an interest rate of 4%, the actual monthly repayments are $2,387.08, but the bank's buffered assessment raises the repayments to $3,326.51. At a higher interest rate of 6%, the actual monthly repayments increase to $2,997.50, and the buffered assessment rises to $4,023.11.
Changes in Bank Assessment Rate:
Period | Bank Assessment Rate |
Before October 2021 | 2.5% (buffer) |
October 2021 onwards | 3% (buffer) |
Notably, banks used to apply a 2.5% "buffer" to their assessment rate, which was increased to 3% in October 2021, making it even harder for borrowers to meet the new criteria.
These tables illustrate the impact of interest rate fluctuations and changes in bank assessment rates on borrowers' ability to refinance their mortgage. It's essential to consider these factors when evaluating your options for refinancing in today's economic landscape.
What is Streamlined Refinancing?
Amidst this challenging environment, hope arises through "Streamlined Refinancing." Some lenders are now offering select borrowers a pathway to refinance with reduced stress tests, known as a "modified Serviceability Assessment Rate" of approximately 1% instead of the usual 3%, provided it exceeds the bank's floor rate.
Refinancing through this pathway could potentially relieve significant mortgage-related stress for many households. It allows borrowers to secure more competitive interest rates, lower their monthly repayments, and access a wide variety of products and features not available with their current bank. However, eligibility for streamlined refinancing comes with certain qualifying criteria, including but not limited to:
- A clear 12-month credit repayment history.
- A minimum individual credit score.
- Principal and Interest Repayments Only (*some lenders may consider Interest Only terms by exception).
- Proposed monthly repayments to be lower than existing monthly repayments.
- Dollar-for-dollar refinances, meaning no debt consolidation or "cash outs."
Speak to Our Mortgage Brokers
If you're considering refinancing your home loan, or you’re having trouble securing finance, we've got you covered! As an authorised representative of most reputable lenders, we're your first port of call. Get in touch with us today, and we'll arrange a free consultation with a mortgage broker to explore your options and pave the way to home ownership.
