Australians facing a 65 per cent surge in mortgage repayments in coming months could have a hard time moving to a cheaper home loan rate because of strict bank lending rules – as one financial expert urges borrowers to push for pay rises now.
The Reserve Bank estimates 800,000 ultra-low fixed rate home loans are due to expire in 2023.
This means those who fixed their mortgage rate at less than 2 per cent in 2021 face moving on to a ‘revert’ variable rate of more than 7 per cent this year – which would see monthly repayments abruptly surge by 65 per cent.
To avoid this, borrowers can switch to another bank in the hope of reducing that increase to a tough but more manageable 50 per cent.
But Australian Prudential Regulation Authority rules require a bank to assess a borrower’s ability to cope with a three percentage point increase in variable mortgage rates.
Australians facing a 65 per cent surge in mortgage repayments in coming months could have a hard time moving to a cheaper home loan rate because of strict bank lending rules (stock image)
Since May, the RBA has raised rates nine times, adding up to 3.25 percentage points, as the cash rate soared from a record-low of 0.1 per cent to a new 10-year high of 3.35 per cent this month.
This means stretched borrowers coming off low fixed rates, looking to switch banks to avoid a high ‘revert’ variable rate, face strict hurdles that could stop them from switching banks.
The rules would also be unlikely to change for at least several months, making life harder for these borrowers.
Aussie Home Loans founder John Symond said APRA, the banking regulator, could this year reverse its November, 2021 decision to raise the stress test threshold to 3 percentage points, up from 2.5 percentage points.
‘Certainly, in the next three months, if there is starting to be a fallout of borrowers, they might do something,’ he told Daily Mail Australia.
‘I think they’ll wait for a few months to see what fallout there is.’
RateCity research director Sally Tindall said existing strict banking lending rules could make it harder for struggling borrowers coming off a very low fixed rate to negotiate a lower variable rate.
‘It can make it difficult for people to refinance, full stop,’ she told Daily Mail Australia.
Ms Tindall said the rules would have to be reviewed once the RBA stopped raising rates in 2023.
‘APRA may need to relook at this buffer in the months ahead so see if it’s still suitable, not just for new borrowers coming through the pipeline but also the people who are refinancing in a much higher rate environment,’ she said.
‘I can only imagine that APRA though is not going to want to tweak it every few months – they are likely to want to get a clearer picture of where the cash rate will land before they make a decision.
‘The rate environment is completely different now.’
APRA’s new chairman John Lonsdale indicated he was open minded about revising the bank lending rules in an interview with The Australian Financial Review in November last year.
‘As I sit here before you now, we think the macroprudential settings – including the serviceability buffer, which is just one of them – are appropriate,’ he said.
‘But if the facts change, our views might change too.’
Aussie Home Loans founder John Symond (right with wife Amber) said the banking regulator could this year reverse its November, 2021 decision to raise the stress test threshold to 3 percentage points, up from 2.5 percentage points
The Big Four banks in May, 2021 were offering average, two-year fixed rate loans of 1.92 per cent but when they expired in May, 2023, RateCity calculated they would be moving on to default ‘revert’ variable rates of 7.18 per cent.
When the APRA rules were changed in November, 2021, the fine print in fixed rate contracts stipulated borrowers with a Big Four bank would be moving on to a ‘revert’ rate of 3.43 per cent.
That was back when the RBA cash rate was still at 0.1 per cent.
Since then, the RBA’s nine rate hikes mean that ‘revert’ rate would have climbed to 6.68 per cent, and two more hikes would take that to 7.18 per cent.
RBA Governor Philip Lowe on Tuesday signalled more rate rises were coming in 2023 to tackle Australia’s 7.8 per cent inflation rate – a level more than double its 2 to 3 per cent target.
The Commonwealth Bank adjusted its forecasts to have the RBA raising rates in March and April to a new 11-year high of 3.85 per cent.
Westpac and ANZ are expecting a 3.85 per cent cash rate by May.
RateCity research director Sally Tindall said existing strict banking lending rules could make it harder for struggling borrowers coming off a very low fixed rate to refinance to a lower variable rate
Should two more rate rises materialise, fixed rate borrowers in coming months would be moving from a 1.92 per cent rate to a 7.18 ‘revert’ rate, equating to a 65 per cent surge in monthly mortgage repayments for a 25-year loan.
A borrower with an average $600,000 mortgage in this situation would see their monthly repayments soar from $2,518 to $4,163.
But someone able to refinance to a 5.72 per cent variable rate in May, should RBA rates keep rising, would instead see their repayments climb by a more moderate 49.5 per cent to $3,764 – a monthly saving of $399.
Ms Tindall said borrowers in this situation needed to really push for a pay rise, with unemployment in December remaining at a 48-year low of 3.5 per cent, so they could pass the stress test to switch banks.
‘This is a difficult one but a very important and effective one: is asking your boss for a pay rise,’ she said.
‘If you haven’t had a decent pay rise in some time, get up the gumption to ask your boss for a pay rise because that could really see some more money coming in every single month but also increase your chances of being able to refinance.
‘Employers are keenly aware of this and so if they think you’re a flight risk, and you might change jobs, they might decide to give you a pay rise or you might decide to try your hand, secure a new job in order to get a pay rise.’
Borrowers looking to refinance are also advised to cut up all their credit cards, with even zero debt balances an impediment to getting a better loan deal.
‘Your credit cards burn a hole in your borrowing capacity even if you do not owe a single cent on that card because what the banks do in their stress test is assume that you have maxed out that credit card just in case that one day you do,’ Ms Tindall said.
‘If you cut up your credit card and show your new lender that you no longer have that account, that will help boost your borrowing capacity.’
While the cost of living is a challenge, Ms Tindall said spending cuts could also make it easier to refinance, which means giving up on things like restaurant meals and fun.
‘Living frugally for a few months will show the bank what you’re capable of if push comes to shove,’ Ms Tindall said.
