Borrowers are extending their loan terms to reduce their payments amid a series of interest rate rises
Analysis from Lendi Group has revealed that half of all borrowers seeking to refinance their mortgages are opting for longer loan terms to reduce their minimum payments in response to a series of interest rate increases.
According to Lendi Group's chief product officer, Travis Tyler, many homeowners are extending their loan terms due to limited options caused by the 3% serviceability rate used by most lenders to assess borrowers' repayment capability.
“A 3% serviceability buffer on a 5% interest rate is impossible for many homeowners,” Tyler told The Australian.
Approximately 51% of mortgage holders who refinanced last month chose to take on a longer loan term, which is consistent with levels observed over the past six months, The Australian reported. Last week’s decision by the Reserve Bank to increase the cash rate by 0.25% resulted in an average monthly mortgage repayment increase of around $76. Since May 2022, interest rates have risen by 400 basis points, adding $15,168 to annual loan costs.
Read next: What’s driving the fall in new lending and refinancing?
It is expected that about 880,000 borrowers will come off ultra-low rates that were secured during the early stages of the pandemic, according to The Australian. In October 2021, the Australian Prudential Regulation Authority implemented a requirement for lenders to assess borrowers' loan servicing capacity at the interest rate plus 3% to prevent overextension. As an illustration, a mortgage holder with a $600,000 loan at a 5% interest rate would be assessed on their ability to afford repayments at 8%, which amounts to $4,630 per month.
Lowering buffer would unlock borrowing capacity
Tyler believed that reducing the serviceability buffer would assist potential homeowners in entering the market. He noted that some lenders are offering a serviceability test at 6%, one percentage point above the lending rate. This adjustment would bring the monthly test down to $3,685, reducing the burden by 20 percent or $765 per month.
“By dropping the buffer, it unlocks an additional 20% in borrowing capacity, allowing brokers to help these eligible Australians search for a lower rate than the one they are currently paying,” Tyler told The Australian.
Mark Bouris, founder of mortgage brokerage Yellow Brick Road, told the publication that the number of people refinancing has significantly declined in recent months as the interest rate cycle approaches its peak.
“Statistically, the refinance market has come off significantly in the last two months,” Bouris said, adding that his business now sees a lot fewer people qualifying for refinancing.
While there are discussions around regular assessments of the buffer, Cameron Kusher, director of economic research at PropTrack, did not anticipate any changes to the buffer rate in the near future.
“I personally don't think that they (APRA) will adjust the buffer rate until such time as the interest rate has peaked,” Kusher told The Australian, adding that rising property prices may further influence the need for buffer adjustments.
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