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Insights into Lending Assessment

Written by Brendan Gilmour

The state of the mortgage ‘market’ in Australia is influenced by various factors, and while interest rates are often the point of focus in the general media – they are just one of the many critical elements that form the pieces of the larger economic puzzle.

Inflation, unemployment, Government policies, global economic conditions, and housing market trends all play significant roles in shaping the accessibility of mortgages in Australia. As a member of the Economic Committee here at Hudson, this is something that our team will analyse in more detail in the coming months in our quarterly report. For now, rather than digging into the WHY let’s consider WHAT is actually happening and WHAT options you have.

Whether you are looking to refinance an existing mortgage, considering a further investment, or entering into your first home loan, you will undoubtedly face some additional hurdles in the current challenging lending environment. It is more important now, more than any other time in recent memory, to educate yourself about your options.

The finance industry, like so many professions, has a ‘discourse’ or ‘dialect’ peculiar to itself – one that is full of acronyms (LVR, LMI, DTI, IO, P&I) the list is long and only adds to further disengagement and misunderstanding about the processes and options available.

Education and communication have been an integral part of the service we provide at Hudson Financial Planning since our inception in 1992 when our founders would travel the country providing educational seminars to improve financial literacy and empower Australians to make informed decisions about how to improve their financial situations, invest and become eligible for better mortgage terms.

The term “mortgage prison” has been bandied around lately implying that borrowers are stuck with their current mortgage as they are unable to refinance to another lender offering more competitive rates, ongoing fees or more favourable policy. This may be due to the
‘assessment rate’ of their refinancing application being considerably higher now than when the original loan was taken. It may be due to the lower property valuation lowering the loan-to-value ratio (LVR) and tipping the loan over the maximum 80% allowable before lenders mortgage insurance (LMI) applies.

If you are worried that you are in this position, reach out and talk to us about your circumstances – we are specialist lenders who are not affiliated with ANY bank, so we have the benefit of being able to compare and match all lenders in Australia. There are many avenues that we can pursue to help improve your current repayments and free up some cash flow.

● Mortgage Rate Negotiation: Lenders are often open to negotiating mortgage rates with existing customers who want to refinance. If a borrower has a good credit history and meets other eligibility criteria, the bank might be willing to adjust the interest rate to ‘retain’ the customer.

● Financial Assistance: Some lenders will offer financial assistance or loan modification programs to help customers stay on track with their mortgage payments. This assistance could include temporary interest rate reductions, repayment plans, or other forms of support.

● Refinancing Options: There are always ‘new customer specials’ being offered to attract borrowers to refinance their existing loans to another lender. They may provide different loan products with competitive interest rates and terms, relaxed
policy and the ability to restructure the type and terms of the loan.

The refinancing option has become more challenging over the past 12 months of interest rate rises with a major factor being that all lenders in Australia are compelled by the Australian Prudential Regulation Authority (APRA) to assess a borrower’s capacity to repay
a mortgage at a rate 3% above the interest rate actually being offered (so for a 6% interest rate you are actually assessed on the ability to make repayments at 9%).

This ‘hypothetical’ assessment rate was appropriate and necessary for lenders to meet their requirements under responsible lending legislation when rates were at an all-time (and unsustainable) low over the previous years. However, now that rates have returned to more historical norms it is no longer practical or necessary for lenders to apply this 3% ‘buffer’ when it comes to existing ‘dollar for dollar’ refinances.

Over the last month, a number of lenders have begun to FINALLY apply a modified buffer of 1% to refinance applications under certain conditions (no new lending, existing loans at least 12 months old to name a few). This is still an evolving space and there are many lenders who are holding back this offer until they are confident they can still meet the strict responsible lending guidelines enforced by ASIC.

If you feel like this new policy may benefit you in your current circumstances then reach out to our dedicated team of lending specialists here at Hudson FP. We’ll be able to advise on the best option for your circumstances.

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