Forget having to visit the doctor to test if your heart can endure high stress—just order a coffee and croissant in a Sydney café and take note of the total.
With the cost-of-living skyrocketing, inflation at 7%, and rates rising 3.75% in a year, Australians are undergoing stress tests every day, with seemingly no relief in sight.
This week, however, The Westpac Group threw borrowers a lifeline by lowering the stress test on select finance applications. For borrowers trapped in mortgage prison, the news couldn’t come sooner. As of Monday, as an ‘exception’, select refinancers who flunk Westpac’s standard serviceability test (AKA mortgage stress test) can now retake the test under a “modified Serviceability Assessment Rate”, so long as it’s above the bank’s floor rate.
Much like supermarkets testing customers to see if they can afford a $5 avocado, banks apply pressure to a borrower’s finances to ensure they can still afford their mortgage repayments if rates were to rise by 3 percentage points above the rate they are applying for, even if the application is a refinance. This means that because they don’t pass the new bank’s serviceability test at higher rates, some borrowers can’t refinance to a cheaper lender. AKA, trapped in mortgage prison.
Usually, these mortgage prisoners are the borrowers most likely to need rate relief to keep their heads above water—households that borrowed at or near capacity when rates were at record lows and the APRA stress test was at 2.5%.
Dubbed “Streamlined Refinance”, the new Westpac scheme, of course, does have its own conditions. Applying borrowers must be refinancing to a loan that has lower monthly repayments than their existing one (which, you would hope, would always be the case), and a credit score of over 650 is needed to be eligible.
Currently, testing to a buffer of 3 percentage points has the safety of both the borrower and the bank in mind to ensure the borrower doesn’t take out more than they can put back. Thanks to 2008, we’ve all seen what lax lending standards / taking out excessive debts beyond one’s income can do to an economy (spoiler alert: GFC).
Despite mortgage prisoners having the ability to negotiate with their current lender for rate cuts, refinancing to a lower cost lender on a new customer rate often reaps the biggest rewards.
While there’d be a lot to iron out if Australia’s banking regulator, APRA, followed Westpac’s lead, allowing mortgage prisoners to refinance to a cheaper lender could prevent some from defaulting on their loan—a scenario all banks would be happy to avoid.
As expressions of relief continue to flood in from Westpac’s decision, the question is, should APRA consider officially lowering the stress test for all refinancers?
Prior to Westpac’s announcement, APRA’s answer was no, stating the stress test buffer would remain at 3%. But that was in February, before most of us even knew what Pedro Pascal was capable of. Things can change in an instant.
