More clients find it harder to refinance

Broker agrees with findings of MFAA survey

More clients find it harder to refinance

A Sydney mortgage broker has backed the findings of the MFAA’s second Refinancing and Mortgage Stress survey showing that serviceability remains the biggest reason customers are stuck in ‘mortgage prison’ and can’t refinance.

The survey, which sought the views of over 440 mortgage brokers, was carried out in February.

It revealed more than half of mortgage brokers had considerably more clients who couldn’t refinance due to serviceability than six months ago when the first survey occurred.

Haydn Marshall (pictured above), the principal of Lend Perspective, said the MFAA survey figures were definitely comparable to what his brokerage had experienced.

Lend Perspective offers both residential and commercial lending, predominantly working with financial planners and accountants as referral partners.

“We've seen over the last six months there has been a slight increase of some rates across providers,” Marshall said. “We're also starting to see some lenders provide not as competitive rates on the back books because they know that the clients are not able to refinance.”

Fixed rate maturities had moved from about 2% to rates in the 6% bracket. “That tripling of interest cost hasn't necessarily been as easily met by some clients,” said Marshall.

The brokerage has a large number of self-employed customers. Marshall said they had been affected by government changes to instant asset write-offs and depreciation schedules, and lenders were less supportive than they had been.

“Now we don't have ongoing depreciation add-backs to show their ability to service because it's been taken into account in one year,” said Marshall.

Self-employed clients had secured cheap asset and equipment finance through the COVID years and they now faced interest rates two to three times higher.

“When you look at their financials for 2023 and soon to be 2024, they won't have a depreciation schedule for those assets because of taking that one-off depreciation and asset write-off in the past. Their serviceability has dropped.”

In the residential sector, Marshall said there hadn’t been a big increase in mortgage stress but more clients were pulling back on their discretionary spending, such as elective surgery and physiotherapy.

“They’re starting to capitalise into their offset accounts, so the average balance we’re seeing is starting to reduce,” he said.

“People are spending less because they’re holding out, either to refinance to a slightly lower rate or in some instances a term extension to reduce mortgage stress over a longer period of time.”

Marshall said lenders were demonstrating a greater level of due diligence when it came  to living expenses, which he applauded.

MFAA CEO Anja Pannek said there were unprecedented levels of refinancing in 2023 with more than 880,000 loans coming off ultra-low fixed rates, with a further 450,000 fixed rate loans expected to expire in 2024.

“We know that borrowers coming off their fixed rates have been doing so in an environment of markedly higher interest rates, following 13 interest rate rises since May 2022,” said  Pannek.

The survey also revealed that 84% of mortgage brokers have clients in a “mortgage prison”, a rise from 82% last year.

“We have heard repeatedly from our members about clients who are good borrowers, with a strong repayment track record, being unable to refinance simply due to buffer rates,” Pannek said.

“This is even when the client’s repayments would actually decrease if they were to switch lenders, trapping more Australians into a mortgage prison.”

1% buffer dollar-for-dollar refinances

Pannek since the first survey last year some lenders had instituted a 1% buffer for dollar-for-dollar refinances.

However, the survey found lenders’ strict requirements for eligibility made it difficult for clients to access financing under this option.

“While 59% of our members told us that the 1% serviceability buffers have made it somewhat easier for their clients to refinance, they also noted that further changes to serviceability buffers would assist more of their clients to refinance,” Pannek said.

Marshall agreed with the findings and said some banks were making it quite difficult for clients to meet their requirements for 1% buffer refinances.

He said clients seeking these loans might be looking to reduce their rate and may be coming towards the end of a fixed rate or an interest-only period but the policies were quite restrictive.

“You may not necessarily be able to compare an interest-only with a principal and interest, or people on a fixed rate with a dollar for dollar refinance because the fixed rate is lower.

In some cases, clients who were going through a separation had been declined access to 1% buffer refinances.

Marshall said brokers must ensure they do their due diligence, calculate serviceability and fully assess clients’ circumstances.

“If they're not able to service at a 2% or 3% buffer, is it necessarily the most appropriate thing to be refinancing them in the first instance?” he said. “It needs to be in the client’s interest on a financial-based outcome.”

If the benefit is a term extension, the downside is the extra interest costs for a 35- or 40-year loan term compared to a 30-year loan, said Marshall.

Mortgage prisoners

Given the difficulty of securing 1% buffer refinances, Marshall said the only thing brokers could do for mortgage prisoners was to seek a sharper rate with the existing lender and speak with the client to coach them on cash flow management.

“There are some lenders actually pricing existing clients lower than they would a new client, which is quite rare,” he said.

“But I'm also seeing some other lenders who are unwilling to match existing rates that they’re providing to new clients.

“We've got clients at the moment who are coming off fixed rates that might as an example  go to 6.5% and they'll have an existing variable rate of 6.2% and the bank is unwilling to match those existing rates.”

Marshall said that it could be the same product with the same client and LVR but because it was rolling off a fixed rate, some banks were unwilling to provide the same aggregate rate across the  products.

He said a lot of this was due to the fallout of the “refinance wars” when interest rates were very low, with banks now having to repay the term funding facility provided by the RBA.

“We’re seeing that repayment cost being pushed onto the clients who were brought onto their books originally when they were utilising those funds.”

Are you clients struggling to refinance due to serviceability? Comment below.