The dismaying calculation, by comparison site Canstar, depicts a country of borrowers under extreme repayment pressure.
Though they need it desperately, it’s the reason many have - until now - been unable to refinance to a loan with a lower interest rate. Ludicrously, they are locked into the more expensive loan because they’re deemed not even able to afford the cheaper one.
Also by Nicole Pedersen-McKinnon:
But a new and welcome relaxation of lending requirements by some lenders means that, if you follow my strategy, you are far more likely to be approved. I was.
Getting your house - or getting to keep it - is all about getting your financial house in order first.
Refinancing prep step 1: Go to (spending) ground
This is easier when everything is too expensive to afford. But a prospective new lender will go through your expenses with a fine-tooth comb for any excesses.
In what’s been dubbed the Netflix test, they’ll want to know where your every dollar goes. So, get cancelling those subscriptions, give the restaurants and food-delivery services a rest and organise drinks at home. (As one mortgage broker - who shall remain nameless - said to me: “People should use cash for pub crawls.”)
It’s only three months. Go extreme frugality.
Refinancing prep step 2: Boost your buffer
Now, the hugely positive new development for your approval is that lenders are, one-by-one, dropping the obstructive 3 per cent interest stress test in favour of a more pragmatic 1 per cent one.
This test is designed to see if you could cope if rates were to go up by that much more. And that’s been the silly part: you are probably already paying close to that rate for your existing loan.
It comes, very simply, down to your expenses versus your income so, do what you can to ‘boost your buffer’. Yes, I know this is probably a pipedream, but how can you up your income before you apply?
Also, if you are a small business owner, know that this could hurt you. Becoming an employee, even if for a short time, could help your loan chances.
Is there an opportunity to work for someone else in the lead-up to a loan bid? I did.
Refinancing prep step 3: Prune your credit limit
This is probably the least-known, vitally important preparation: your credit card limits, even if the balance you carry over from month to month is zero, will reduce your income.
Lenders have to factor in - or, more accurately, rule out - the full repayment of your credit limits over three years. They multiply your (even unused) collective card limits by 0.038.
So, if you have $10,000 in limits, that’s $380 of your pay ruled out for repayments. You will likely need to reduce your limits to a level that means you can cover repayments. Doing so is a neat trick to vastly improve your income stress test.
But just be aware that that same three-years-to-clear calculation now applies if you want your limits back - post-refinance, you need that much fat left in your finances. As such, you may not get that level of credit again.
And note that, if you’re over 50, credit card applications are less likely to get approved.
And now, finally, you are ready for the last loan step.
Refinancing prep step 4: Preen for your no-second-chances selfie
Our now-US-style credit-score system means your money self is summed up in one stark number. It is vital that you present yourself in the best possible light. You may even need to do some financial ‘photoshopping’.
Begin by getting a free copy of your credit report and score from one of Australia’s three credit bureaux: Equifax, Experian and Illion.
Next, see if there are any black marks, blips, or simply mistakes on there. You can then fix mistakes by going to the institution or utility that made them.
If your money history is a little chequered, take solace from the fact that good budgetary behaviour will slowly, month by month, salvage your score.
In any case, be aware that you have just 14 days’ grace after a credit repayment is due and 60 days if it is any other type of payment, before a late payment is noted on your credit report - and your score goes down.
But keep your credit record squeaky clean and follow my three other insider ‘prep steps’, and you should sail through the application process for a new, cheaper loan.
Then you - like I am anew - should embark on a million to get mortgage-free easier, faster and cheaper. And get out of harm's way of the Reserve Bank.