Stress Test Slashed

Welcome to the finance update for the week ending 27 May, 2023.

As we reported a few weeks ago, signs are emerging that refinance cashback offers are coming to an end. This trend certainly seems to be gaining momentum with CBA, NAB and now Westpac all confirming that they are pulling the pin on this tactic. Yet to follow suit is ANZ but we fully expect them to do so in the coming weeks. What is more difficult to predict is whether the smaller lenders will also abandon their cashback offers.

Whilst on lenders, it is with interest we note that three of the big four banks (CBA, NAB and Westpac) have all edged their variable rates up even further in the last week.

In this week’s newsletter, we look at how Westpac is bending it’s traditional loan serviceability rules to help borrowers refinance.

What is a ‘stress test’?

Traditionally, banks subject borrowers to stress tests to ensure they can comfortably afford mortgage repayments if interest rates were to increase by three percentage points above the applied rate.

So for instance, a variable-rate of 5.50% would be stress tested under a serviceability of 8.50%.

As a result, this has posed a challenge for some borrowers looking to refinance with a more affordable lender as they don’t pass the new bank’s serviceability test at higher rates.

What is Westpac’s new offering?

From this week, Westpac will allow select refinancers who do not meet the bank’s standard serviceability test to undergo a “modified Serviceability Assessment Rate”.

To be eligible for Westpac’s new “Streamlined Refinance,” customers must have a credit score of more than 650 and a good track record of paying down all existing debts in the last 12 months.

Borrowers must also be refinancing to a loan that has lower monthly repayments than their existing one.

Will other lenders follow?

Typically, if one big bank implements a significant new product or policy, the other big banks soon follow. If, or perhaps when, the other banks follow, this will be good for borrowers who are currently stuck in a loan they can’t get out of because of existing interest rate buffers.

With cashback incentives disappearing, could this be the new competition frontier? Time will tell.

Any changes in interest rates from last week are highlighted in orange.

Note – Increases announced by lenders as a result of RBA decisions normally take 1-2 weeks to come into affect.

Standard Variable

The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.

1 Year Fixed

The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.