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Interest Rates, Inflation: Westpac offers a lower mortgage refinance stress test for some applications


Westpac will lower the stress test for homeowners looking to refinance in an effort to help borrowers avoid a “mortgage prison.”

Nearly 900,000 Australians who obtained record low interest rates on a fixed-term mortgage during the Covid-19 pandemic will have come off interest rates and will face significantly higher interest levels on their new repayments.

Making matters worse, some who want to refinance their loan with a new bank in the hopes of a lower interest rate find themselves stuck where they are because they can’t pass a financial stress test.

In the standard test, a bank checks a borrower’s finances to make sure they can still pay back if interest rates rise 3 percent more than the rate at which they are currently willing to borrow.

Starting next week, Westpac will allow some people looking to refinance their mortgage to be tested under a “modified maintenance rate” if they fail the standard maintainability test.

To qualify, customers must have a credit score above 650 and a good record of paying off all existing debt within the past 12 months.

The move has been praised by RateCity, which has called on the banking regulator to lower the rating rate for people looking to refinance existing loans.

“The current 3 percentage point buffer helps ensure that new borrowers do not take on excessive debt relative to their income,” reads a statement from the financial comparison website.

“However, the test locks some existing borrowers into mortgage prison.

“These are often households that borrowed at or near capacity when interest rates were historically low and the APRA stress test was at 2.5 percent. Yet it is these borrowers who probably need rate cuts more than ever to stay afloat.

“While different stress tests for new and existing borrowers would be more complicated for the banks to conduct, allowing people in mortgage jail to refinance their loan could potentially help prevent some from defaulting on their loan.”

Data from the Reserve Bank of Australia in April predicted that about 880,000 Australians who had their mortgages locked when interest rates were at historic lows would have come off interest rates by the end of 2023 and face massive increases by the end of 2023 of the interest payments on their loans.

Research director Sally Tindall said Westpac’s decision was a “strategic move” to bring in new customers while still complying with responsible lending practices.

She also called on APRA to lower its stress test, saying many Australians who borrowed at capacity when interest rates were historically low were now struggling with skyrocketing repayments.

“It seems ridiculous to keep these borrowers locked up in a mortgage prison when a decent rate cut could be enough to help them stay afloat,” she said.

“These borrowers have already signed off on the debt – the damage is done. Giving them a way to minimize the impact is what they need now, and it’s important to have a range of lenders to choose from.”


Joanna Swanson

Joanna Swanson is Europe correspondent at the Thomson Reuters Foundation based in Brussels covering politics, culture, business, climate change, society, economies and inclusive tech. With specific focus in breaking news, she has covered some of the world's most significant stories.