Some refinancers are stuck with their current loans

Some homeowners looking to refinance their home loans to reduce debt have discovered they’re stuck with their current loans due to stricter rules enforced by the Australian Prudential Regulation Authority (APRA).

One lender said stricter controls are penalising those with good credit histories on loans granted before APRA tightened rules in 2015, leaving borrowers unable to take advantage of better offers.

Towards the end of March, APRA told banks to restrict higher-risk interest-only loans to 30% of new residential mortgages. This move was designed to improve the banks’ and households’ balance sheets.

For those looking to refinance, assumed expenses have increased, and 20% of the principal needs to have been paid before they’re eligible to secure new loans from most lenders.

According to Shane Oliver, chief economist at AMP Capital, the rule changes have led to “unintended consequences” for some.

“It is well known that [APRA’s macro prudential controls] can have unintended consequences, which they regrettably aren’t necessarily aware of,” Oliver told the Domain Group. “An issue of that is borrowers coming in on the old lending standards and finding themselves unable to refinance.

“It’s probably a relatively small part of the market and the positive impact of tightening lending standards probably outweighs problems with that sector at the moment,” he added.

Oliver said the new standards will act as enforced belt-tightening for borrowers who’ve hit, or are close to hitting, the limit. They’ll need to pay more principal off before they can access lower interest rates with other banks and lenders.

AMP’s new serviceability criteria, for instance, has new higher minimum weekly living expenses assumed for applicants at varying incomes in its assessments for loan applications.

A borrower with no dependents and an annual income of $300,000 has minimal monthly expenses of about $3,760 a month, while families with two children are deemed to have minimum monthly expenses of $4,000 on joint income of between $160,000 and $200,000.  

Anthony Baum, founder and CEO of Tic:Toc Home Loans, said a “reasonable chunk of borrowers” would not meet new serviceability standards when they apply to refinance their mortgages. Despite no alterations to their income or expenses, they’re stuck with their current lender and are unable to access better deals.

The fintech company, which offers online loan approvals for its customers in 22 minutes, writes 55% of its business in refinanced mortgages.

“We see a lot of customers that don’t understand why they don’t pass serviceability tests when things are unchanged from when they were granted the loan previously,” Baum said. “Either they weren’t assessed properly in the first place or serviceability-related macro measures have meant they are not able to benefit from competition in the marketplace.