Mortgage industry leader Mark Bouris has called on the banking regulator to relax lending rules that make it difficult for borrowers to refinance.
The Australian Prudential Regulation Authority is denying its demand that banks approving a loan must assess whether a borrower is able to cope with a three percentage point increase in variable mortgage rates.
While this stress test puts an end to reckless lending, it also means that borrowers coming off an ultra-low 2 percent fixed rate will face an abrupt 88 percent increase in their monthly repayments as they may be forced to pay a much higher interest rate. 7.68 percent ‘refund’. variable interest.
Without being able to refinance, an average borrower must pay $9,120 more per year in mortgage payments than they otherwise would during a cost-of-living crisis.
Mr Bouris, the executive chairman of mortgage broker Yellow Brick Road, who previously hosted Celebrity Apprentice, told Daily Mail Australia that APRA had to relax the existing three percentage point rule for existing borrowers who want to refinance.
“This way we can minimize the number of consumers who are stuck with a bad deal on their home loan,” he said.
“Anything we can do to help them get a better deal without necessarily taking out extra credit would be a good thing.”
Mortgage industry leader Mark Bouris (pictured with model Monika Radulovic) has called on the banking regulator to relax lending rules that make it difficult for borrowers to refinance
“I support a reduced buffer for refinancing while maintaining borrowing standards for those who want to take on new debt for the time being.”
RateCity calculated that the existing APRA rules meant that someone who secured their mortgage for two years in 2021 would face an 88 percent increase in their monthly payments, with no option to refinance to a lower rate.
A professional earning an average full-time salary of $90,329 in 2021 could borrow the maximum of $639,200 at a low fixed rate of 1.94 percent and pay $2,343 per month on their loan.
The fine print at the time said that this mid-mortgage borrower would return after two years to a variable rate that was 3.33 percentage points higher than the Reserve Bank’s cash rate.
The RBA cash rate was at a record low of 0.1 percent at the time, but since May 2022 it has risen to an 11-year high of 4.1 percent, with June’s rise on the 12th in just over a year .
All four of Australia’s major banks – Commonwealth Bank, Westpac, NAB and ANZ – now expect the Reserve Bank to raise interest rates again to 4.35 per cent in July.
If those predictions come true, that borrower now paying a fixed rate of 1.94 percent would be forced into a 7.68 percent “revert” rate when the two-year period expired in 2023.
This would increase repayments by 88 percent, or $2,056, from $2,343 to $4,400.
But RateCity said that if this borrower were able to refinance to a lower rate of 5.75 percent, monthly repayments would increase by a more manageable 55 percent to $3,640.
RateCity research director Sally Tindall said the existing rules were a ‘mortgage prison’
The $1,296 increase would be $760 per month less than the $2,056 increase under the higher “refund rate,” which equates to savings of $9,120 per year.
RateCity research director Sally Tindall said the existing rules were a “mortgage prison.”
“Many of these borrowers are likely to still end up in mortgage jail because interest rates are much higher than the previous stress tests,” she told Daily Mail Australia.
“Thousands of borrowers gearing up to get rid of their ultra-low fixed rates in the coming months could get the shock of their lives when they plan to refinance, only to find themselves trapped.
“Yet refinancing could be the panacea many need to get through what is about to be the biggest financial test of their lives.”
APRA increased the stress test from 2.5 percentage points to three percentage points in November 2021.
While Mr Bouris wants the rule relaxed for borrowers to refinance, he said the existing framework for new borrowers should be maintained until after the RBA has stopped raising rates.
“Given the aggressive stance the RBA has taken to address inflation, we have no guarantee that we have reached a spike in interest rates or even that rate hikes are about to slow down,” he said.
‘So I think that interest rate buffers are very important for customers who want to enter the market through a property purchase.
“Given that the Australian home loan market has historically been dominated by variable rate mortgages, we should not consider a reduction in overall home loan buffers until rates have stabilized over a period of time.”
Mr. Bouris, who was forced to sell his home 33 years ago when RBA interest rates hit 17.5 percent, was devastating to the RBA because it was obsessed with inflation at the expense of borrowers (he is pictured in 1990)
The four percentage points of the Reserve Bank’s rate hikes since May 2022 are the heaviest since 1989, surpassing any consecutive hike since the target rate era began in 1990.
Mr. Bouris, who was forced to sell his home 33 years ago when RBA interest rates hit 17.5 percent, was devastating to the RBA because it was obsessed with inflation at the expense of borrowers.
“I have seen firsthand the damage this causes to a large number of families,” he said.
Inflation rose to 6.8 percent in April from 6.3 percent in March, according to monthly figures from the Australian Bureau of Statistics.
This put the consumer price index well above the RBA’s target of two to three percent.
The Council of Financial Regulators — made up of the RBA, Treasury, APRA and the Australian Securities and Investments Commission — on Wednesday doubled down on existing lending rules.
“Council members supported APRA’s assessment that the maintenance buffer – currently set at 3 percent – remains at an appropriate level given the current environment, including the high level of uncertainty and risks to the economic outlook,” the council said.
APRA wrote to banks on Friday, warning that too many exemptions so more borrowers could refinance would be bad for financial stability.
“Large amounts of exceptions can create risk by weakening banks’ risk profile and increasing the vulnerability of their loan portfolios to future shocks,” the report said.
But the banking regulator said those banks that did allow exceptions to the APRA lending rules should take past repayment history into account, noting that previous exemptions accounted for only two to three percent of total mortgage loans.
It is important that exceptions are used in a prudent and limited manner, so as not to undermine the intent of the core policy.
“Within the APRA prudential framework, banks can use policy exceptions if they are managed prudently and in a limited manner.
This approach allows banks to consider additional indicators of repayment capacity beyond those captured in the standard maintenance test.
“For a borrower who wants to refinance, this can also be about repayment behavior in the past.”