Why a new lender can say no
A refinance is assessed as a new loan, and APRA’s June 2023 letter to banks said plainly that some borrowers seeking to move to another lender may not meet standard criteria, for varied reasons. It asked banks to assess those loans case by case. The buffer itself is on page 3, and the equity question on page 2.
The same letter describes a narrow way through. Banks may approve a loan as an “exception to policy”, outside standard criteria such as the buffer, if exceptions are managed prudently and kept limited. For a borrower who is refinancing, APRA said the bank could take into account indicators the standard test misses, such as past repayment behaviour. It singled out one kind of loan written this way:
“Like-for-like refinancing is often used to describe a situation where a borrower moves between lenders without increasing their total debt exposure.”
APRA, letter to authorised deposit-taking institutions, 9 June 2023, footnote 1
Whether a particular bank makes such an exception is its own decision. APRA expects exceptions to be used in a prudent and limited way, and said banks reporting large volumes of them would face heightened supervisory attention.
Staying, on better terms
Not moving lenders is not the same as keeping the same price. Moneysmart’s first step before switching is to tell the current lender about the cheaper loan elsewhere, because it may cut the rate to keep the business; at least 20% equity gives more to bargain with, and a good credit score helps. The ACCC found such retention offers could be available to borrowers who were not about to leave, and the numbers it recorded are on page 5.
A lender can also move a borrower to a different loan of its own. Moneysmart calls this refinancing internally, and notes it can carry a switching fee.
The law on hardship
When the repayments are the problem
If a refinance was meant to make repayments manageable, the hardship rules are the other door. Under section 72 of the National Credit Code, a borrower who considers they are or will be unable to meet their obligations may give the lender a hardship notice, “orally or in writing”. The lender does not have to agree. The Code’s own note says it need not, especially if it “does not believe there is a reasonable cause (such as family violence, illness or unemployment)”, or reasonably believes the borrower could not meet a changed contract either.
A hardship request is made to the current lender, so it does not depend on passing a new lender’s test. The time limits the lender then works to are on Moneysmart’s page on problems paying a mortgage.
The National Debt Helpline’s steps
When a refinance was the plan for making repayments manageable and it has fallen through, the National Debt Helpline, a free service of financial counsellors, sets out five steps for anyone struggling with mortgage repayments. In its order, and in our words:
Work out what you can afford
Do a simple budget first. If you can pay something, start paying that amount and contact your lender straight away to ask for hardship help and an arrangement you can afford. If you cannot pay anything, call the Helpline straight away for advice.
Understand your options
A lender may be able to lower repayments for a while. The Helpline’s examples, in its order:
- a longer loan term, so each repayment is smaller;
- interest-only repayments for a period;
- repayments cut to the minimum monthly amount;
- using any money available in the loan’s redraw;
- rolling debts such as a personal loan and credit card into one loan with the mortgage, to lower total repayments;
- some mix of these.
If for a while you cannot make any repayments at all (the Helpline’s example is three months), a lender may consider a repayment deferral, provided you can show you will be able to go back to normal repayments when it ends. If the hardship is not temporary, you can ask for hardship help that gives you time to sell, and the Helpline asks you to call one of its financial counsellors to talk through the options.
Ask your lender for its hardship department
Contact the lender as early as you can, ask for the hardship department and say you are in financial hardship; its staff will explain the options and offer a hardship variation. Before you accept one, make sure it is:
- affordable: if it is not, don’t agree, and insist on a repayment amount you can afford;
- long enough: if you know you will need several months, don’t accept an arrangement that only runs for a short time;
- complete, saying what happens at the end: if you will not manage higher repayments once things improve, ask specifically for the arrears to be added to the loan and the loan term extended.
If the hardship is not temporary and the loan cannot reasonably be repaid, you can also negotiate time to sell the home. The other option is to surrender it to the lender; the Helpline says to sell it yourself if at all possible, because that usually brings a better price.
If you cannot agree, dispute it
If the lender will not agree to a repayment arrangement, have that decision reviewed by the Australian Financial Complaints Authority, which the Helpline describes as a free service. If the lender is threatening legal action, call the Helpline immediately on 1800 007 007 to speak to a financial counsellor.
Talk to a financial counsellor
Use the Helpline’s phone line or live chat, or arrange to see a local financial counsellor.
Free help, and who it is not
National Debt Helpline
Monday to Friday, 9.30 am to 4.30 pm. Live chat on weekdays, 9.00 am to 8.00 pm, at ndh.org.au.
Moneysmart describes financial counselling as free and confidential, offered by not-for-profit community organisations. It adds a warning that matters on a page about refinancing: a financial counsellor never charges, and businesses that charge fees for this kind of help are debt consolidation and refinancing companies, not financial counsellors.
Back to the six pages, or start again at break costs on a fixed loan.