July cash rate: Could changed serviceability buffers help refinancers?

In its meeting today, the RBA board decided to hold the cash rate at 4.1%, giving reprieve to homeowners.

As interest rates have increased in line with the cash rate hikes over the last year, it has become harder for some mortgage holders to refinance their home loan. However, to overcome this, some lenders are reducing what is called a ‘serviceability buffer’, making it easier for some borrowers to meet the criteria to refinance.

What is a serviceability buffer?

Lenders are required to use a serviceability buffer when determining how much a person can borrow to make sure they can continue to meet repayments even if interest rates increase or their circumstances change. The Australian Prudential Regulation Authority (APRA) recommends a buffer of 3%, meaning lenders calculate whether a borrower could comfortably meet repayments if the interest rate on the loan was 3 percentage points higher at the time the loan is granted.

How has the serviceability buffer been impacting refinancers?

As interest rates have increased, some people have found themselves in what is called “mortgage prison” where their income has not kept pace with higher repayments. If someone took out a home loan when the cash rate was at 0.1%, they now would have exceeded the stress test that was applied at the time as the cash rate has increased more than the 3% serviceability buffer. 

In some cases, lenders applying a 3% serviceability buffer on top of the current increased interest rate could disqualify a number of borrowers from refinancing their loan, essentially trapping them with their existing loan and interest rate.

What has changed?

Major lenders Commonwealth Bank and Westpac have announced they will reduce their serviceability buffer to 1% for eligible borrowers who haven’t missed any repayments in the last 12 months and hold equity in their property. This means some homeowners who previously were ineligible may now be able to refinance to a lower interest rate.

Can I refinance my home loan?

There is a good chance we will be able to find a lender that will refinance your loan, or work with you toward a solution. Whether you need to free up cash for a project, want to consolidate debt or see if you could be on a better rate, we can search the market to find the right solution for you. Lenders are making refinancing more accessible for people who otherwise would be facing a mortgage prison and there are still competitive deals in the market. Simply reach out and let us do the legwork for you.