Commonwealth Bank (CBA) is joining Westpac in slashing its stress test for select home loan refinancers, but there’s a major catch.
Banks typically stress-test mortgage applications to make sure the borrower could afford repayments if rates were to rise by 3 per cent above the actual rate they were applying for.
Some borrowers are currently unable to refinance to a cheaper lender because they don’t pass this test at the higher rates. This leaves them stuck in “mortgage prison”.
Also read: CBA’s major RBA interest rate cut prediction
From Friday, CBA announced it would lower the stress test from 3 per cent to 1 per cent for refinancers who did not pass its standard test on a 30-year loan term.
To qualify, customers must have a loan-to-value ratio of at least 80 per cent, a good track record of repaying their debts in the past 12 months, and be refinancing to a principal-and-interest loan of a similar or lower value.
CBA’s lowest variable rate for owner-occupiers paying principal and interest with a 20 per cent deposit is currently 6.34 per cent. This means refinancers could be stress tested at 7.34 per cent, instead of 9.34 per cent.
Importantly, the loan must be refinanced back out to a 30-year loan term, which RateCity said could be a “costly catch”.
“Forcing refinancers to extend their current loan term has the potential to cost tens of thousands of dollars over the life of their loan – something that should be considered as one of the last resorts, rather than a first port of call,” RateCity research director Sally Tindall said.
“What these borrowers need is options, and ideally ones that aren’t going to come back to bite them in the long run.”
How much will it cost?
RateCity found that someone who took out a $500,000 loan three years ago with a Big Four bank could see their repayments drop by $235 if they refinanced to CBA’s lowest variable rate.
But, since they would be extending their loan term by three years, they would end up paying an extra $32,117 in interest over the life of the loan, compared to if they had done nothing.
If they instead took out Westpac’s lowest-rate loan, which has an introductory rate of 5.94 per cent, they would see their repayments drop by an additional $10 a month with the same loan term.
But, over the life of the loan, the borrower would pay $45,078 less interest than doing nothing and $77,195 less interest than the CBA option.