As borrowers come off their record low fixed rate mortgages, brokers are turning to lenders that offer exceptions to the APRA-imposed 3% serviceability buffer.
While APRA has held firm against changes to the buffer designed to prevent excessive borrowing, 12 cash rate increases in 13 months could have left many borrowers in “mortgage prison”, unable to refinance their loan.
However, the mortgage cliff has generally failed to materialise as lenders have side-stepped the buffer by offering exception policies, resulting in a record number of borrowers refinancing.
Will Taweel (pictured above left), regional director of national brokerage InvestorFi, said these policies had helped clients to move onto cheaper rates, improve cash flow and minimise interest charges.
“It really assists our clients that were locked out of the market be able to obtain another asset for their portfolio or allow a client to purchase at a higher price than previously,” Taweel said.
APRA is of course aware of these exceptions to its rule and has warned lenders of the risks of liberalising these exception policies.
However, it has become increasingly clear that many of the 800,000 borrowers rolling off fixed rates this year would not be serviced without them.
While refinancing levels may have peaked in July, PEXA data showed that it continues to increase on a seasonally adjusted basis.
Leigh Bennett (pictured above right), senior broker associate at InvestorFi, said in an increasing interest rate environment, these products have had a “powerful effect” on the ability to service dollar-for-dollar refinances.
“A client we helped yesterday has been able to save about $9,000 per year in interest by refinancing over to Bankwest,” Bennett said in a LinkedIn post at the start of September. “This is life changing stuff but before these products were introduced, this would have been impossible in their scenario.”
However, these policies come with limitations where the lenders will not allow equity release, debt consolidation or purchases.
For example, NAB’s case-by-case policy introduced in July requires the customer has a principal and interest (P&I) loan; over 20% equity in their home; and is looking to refinance the same amount and cover any bank-related fees up to 1% of the loan value.
Taweel said InvestorFi employed a variety of strategies to help their investor clients meet these conditions.
“We utilise these dollar-for-dollar refinances to improve the monthly household cash flow. Most lenders will also enforce P&I repayments so we will present a cost-benefit analysis and a cashflow analysis if an investor client is moving from interest only (IO) to P&I repayments,” Taweel said.
“The interest rate may decrease but the actual dollar repayment per month increases, and our clients can make an informed decision if they prefer the cheaper rate or would like to maintain their cashflow by staying on interest-only repayments.”
While banks have offered buffer rate exceptions, non-bank lenders – which are not subject to APRA’s 3% buffer rule and operate under a lower buffer mandated by ASIC – have also become increasingly important.
InvestorFi said non-bank lenders such as Firstmac, Resimac, Pepper Money, and Liberty Financial have all reduced buffer rates, from 1% to 2%, while Granite Home Loans also have a “very simple product that can really help”.
Additionally, some non-banks have looked to improve their offerings in other areas to compensate for higher interest rates.
For example, Pepper Money’s latest package of loan options promised reduced interest rates, same-day turnaround times for submissions, no break costs, and longer loan terms as well as a lowering its serviceability buffer across the board.
Some lenders have appealed to borrowers and brokers in other ways, with Rate Money introducing a no-fee, no-clawback product line in July.
Taweel said these policies were becoming more important in the current market and had given their clients more opportunities that they previously had, as borrowing capacity eroded with “hasty interest rate rises”.
“A key point of difference is the non-bank lenders’ 2% buffer is applicable to purchase applications versus the banks, which only offer their 1% buffer policy to dollar-for-dollar refinances,” Taweel said.
“The trade-off would be that non-bank lenders generally have higher rates than the banks so we assist clients to make informed decisions about taking on this debt.
“We provided a clear breakdown of the portfolio cash flow to ensure they are comfortable holding onto a negative cash flow property for the short to medium term and the net cash flow does not exceed their household budget threshold.”
While serviceability rates have a major influence over borrowing capacity, it’s important to note that there are many considerations that brokers apply when assessing a loan.
Taweel said brokers were bound by best interest duty, so the “client always comes first”.
“At InvestorFi we always provide a tailored finance proposal to show clients the different options across a range of lenders, as an example borrowing capacity is broken down across the banks with lower rates compared to non-bank lenders with higher rates but have more generous borrowing capacity,” Taweel said.
“The client is then able to decide if rate or the higher borrowing capacity is their priority. It is a combination of interest rate, serviceability, turnaround times, and the client goals and objectives that will determine the final lender selection.”
What mortgage products are helping you service clients in the current environment? Comment below.
