What's improving loan serviceability?

Tax cuts, lenders softening the way they calculate clients’ expenses as the cost of living rises, and customers consolidating debts – these are some of the reasons why serviceability barriers have eased, says Aussie Home Loans mortgage broker Melanie Smith.

The franchisee of Aussie Windsor in Brisbane’s inner north and Elite Women 2024 recipient spoke to MPA about what trends she has been seeing among her clients, following the release of the MFAA’s August 2024 refinancing and stress survey.

The report is the third to gauge the views of MFAA broker members on their borrowers’ ability to refinance and the extent of mortgage stress following surveys in February 2024 and July 2023.

The August 2024 survey involved 372 mortgage brokers – almost 2% of Australia’s 19,500 brokers.

It showed that serviceability continued to be the number-one challenge for home loan borrowers looking to refinance but this issue had improved somewhat, with 68% of mortgage brokers identifying serviceability as the main reason clients were unable to refinance in the past six months, compared to more than 80% previously.

More than half of those surveyed said the 1% serviceability buffer offered by some lenders for “like-for-like” refinances had assisted their clients get a better deal.

Client concerns about meeting mortgage repayments had dropped from 93% in July last year to 70% last month.

Serviceability relief

Smith (pictured above) has been a broker for 14 years and made the move from being an Aussie mobile broker to a franchisee in October 2023,  opening the Aussie Windsor store in December.

When it came to serviceability challenges and clients being unable to refinance, Smith said the recent Stage 3 tax cuts had definitely helped by putting more “money in people’s pockets”.

“We had a really good window for a little while after the tax cuts and before HEM (household expenditure measure) caught up to go ‘right, let’s go hard’ and we did really churn a few out that were struggling to service,” said Smith.

She said some lenders took into account borrowers’ bonus pay and factored in the increased cost of living in HEM “rather than on top of HEM”.

“It’s not just the 1% buffer, it’s been the other little tweaks and changes the lenders are starting to make to free up that [refinancing],” she said.

“The banks are changing some of the requirements on the customers declared living expenses, so they’re putting some of those living expenses back into basic HEMs – some private school fees are under HEM.”

Smith said some customers might have children in Year 12 with just four payments remaining before they left school, so the bank would reduce the CDLE in line with that forward position.

For those clients struggling to make ends meet due to cash flow and hoped to refinance when they were in a better financial position, Smith worked on helping them with a debt consolidation plan.

She said this might include adding their credit card debt or car loan onto their mortgage.

“We’ve had to stretch someone from a 25-year mortgage back to 30 years just to free up that cash flow for now – that sometimes has to be the answer.”

While there was reluctance to do this under a responsible lending framework, Smith said it was sometimes necessary to “get the customer what they need and put them in a better position for now.”

Only a few clients had sought like-for-like refinances. “People weren’t coming to us just for a straight dollar-for-dollar refinance – there’s something else they want to do or we were giving them opportunities to clear other debt.” 

Spending habits

In a world of instant gratification, when people want to buy something they just put it on their credit card whether they can afford it or not.

Smith said people just ‘tap and go’ and think about it later. “Suddenly they’re maxed out and they say ‘I’ll go get another credit card’ but no, now you can’t.

“We have certainly seen a lot of people who are maxed out on all of their stuff … we recently had a customer that went down from 25 individual repayments on things down to two.”

Some people were enticed by the offer of instant cash loans on TV, which led to them making terrible choices. “Then they come to us and it’s urgent and then we fix it.”

More than a quarter of respondents in the MFAA refinancing and mortgage stress survey said that cost-of-living concerns were the most likely reason for financial stress.

Smith said while Windsor is in a high income area that meant some people were overcommitting on their finances, spending on eating out and takeaways, while grocery prices, petrol and electricity bills rose.

But she said more clients were becoming aware of what they were spending and making adjustments accordingly.

New clients seeking brokers’ expertise

In the survey, 91% of brokers said they had clients using a broking for the first time to help them refinance.

Smith said she had experienced this too and gave the example of a woman who contacted her about buying a home.

“She said, ‘I’d never even considered using a broker, I’ve always just walked into my bank,’  and I thought, we’re not obviously advertising well enough,” Smith said.

“This should be part of everyone’s mentality – go to someone who knows what they’re doing.”

But Smith acknowledged the high market share brokers now enjoy – 73.7% of all home loans are now written by brokers, according to the latest MFAA data.

“I certainly felt that we [brokers] got thrown under the bus after the royal commission but I think a lot of positive change came out of that as well – we worked really hard to demonstrate our professionalism and how we work for customers. We’re for the customer, not for the bank.”

What do you think are the biggest factors affecting clients loan serviceability and ability to refinance? Comment below.