Over the last 18 months or so, we were being told ‘no’ for a lot more home loan applicants than usual because the banks were forced to use a high ‘assessment rate’ on both new home loan lending and existing lending not being refinanced. When you apply for a loan, the lender is required to give you a ‘stress test’ to make sure that if interest rates rise you can still make payments on both new debts and existing debts.
If you or someone you know was rejected, I’m sorry. It’s never nice being the bearer of bad news and it was an incredibly frustrating experience if I’m honest. I hate seeing clients denied their hopes and dreams because of a policy that was stricter than it needed to be.
And in this case, it was just an overreaction on the part of regulators – it hurt people and it hurt the broader market at the same time.
It also created a group of home loan borrowers known as “Mortgage Prisoners”. These are borrowers who are currently making their home loan repayments with no problems at all but are unable to refinance to a cheaper lender due to strict lending policy. They were effectively being told they can’t afford the proposed loan even though the repayment would be lower than their existing repayment!
Don’t get me wrong, I think some tightening of policy was needed but this was overkill.
Because of the way the rule works – the banks were forced to make sure you can afford to pay off your mortgage at… 7.20% to 7.45% about DOUBLE the going rate of 3% to 4%. Do you remember the last time we had interest rates of 7.45%?
Exactly. But if you couldn’t pay back your mortgage at 7.45% then you would be refused a loan.
It was in 2008 if I remember correctly.
To bring some sanity back to the market lenders have now switched to a ‘current rate plus a 2.50% buffer model.’ For example, if lender has 4% variable rate and you apply for the loan they might assess if you can cope if the interest rates jump to 6.50%.
That means a lot of people who were refused loans over the last 18 months to 2 years could try again and get approved now that the new borrowing capacity tests have been approved.
If you or someone you know has been rejected for a loan in the last 12 months to 2 years then they may now have a chance of being approved with the new borrowing capacity tests. To try again all you have to do call 1300 661 211 or enquire online at https://www.mortgageworldaustralia.com.au/contact-us/ and we can take care of the rest.
Patrick is a Director and a Home Loan Specialist. He has been helping Australians with home loans since 2001. Prior to working as a mortgage broker Patrick was employed by Macquarie Bank for 3 years and also worked as an accountant for a publicly listed company. Patrick holds a Bachelor of Business majoring in Accounting and sub-majoring in Finance and Marketing from University of Technology, Sydney.