When you apply for a home loan with a bank, your application will hinge on your ability to meet repayments according to the serviceability buffer.

The serviceability buffer is set by the Australian Prudential Regulation Authority (APRA) and, as of September 2024, demands that banks make sure new borrowers can meet repayments if their interest rate is 3.00% p.a. more than the rate they're applying for.

It ensures borrowers can continue to meet repayments if interest rates rise or their financial circumstances change.

However, there's likely a cohort of home loan borrowers who secured their mortgage some time ago, perhaps when interest rates were at record lows in 2021-22, and wouldn't be eligible for their mortgage if assessed in today's interest rate environment.

In other words, they're in 'mortgage prison' - stuck with their current mortgage as they aren't eligible for a more competitive deal.

So, does that mean said borrower can't refinance their home loan, even if doing so would lower their repayments? Fortunately not, as like-for-like refinancing could be an option.

What is like-for-like refinancing?

Like-for-like refinancing is a way that banks can assess a refinancer's application without considering the serviceability buffer.

Since this assessment falls outside typical lending policies, it's not guaranteed. Still, it's worth exploring if you feel trapped in your current mortgage.

As the name suggests, like-for-like refinancing might be an option for borrowers who don't meet current lending standards but aren't making major changes to their home loans.

They're likely seeking to refinance their mortgages without changing core aspects of it, like:

  • The amount borrowed

  • Their loan's structure

  • The asset used as security

Instead, they might be simply seeking a home loan with a lower interest rate, fewer fees, or more appropriate features.

It's important to note, while refinancing might ease a borrower's repayment burden, it won't reduce their overall debt. Borrowers who are struggling should consider contacting their lender's hardship team for support.

See also: Cost of refinancing a home loan

Big four banks assess refinancers differently to new borrowers

It's likely that many Australian banks forgo the serviceability buffer when a refinancer is applying for a similar home loan to the one they're already servicing.

Major lenders, including the big four banks, are among those offering more flexibility to eligible borrowers.

CommBank, Westpac, and NAB each revealed changes to their serviceability testing when dealing with refinancers in 2023.

The former bank reportedly assesses eligible refinancers using an interest rate buffer of 1%.

So a borrower applying for a home loan with an interest rate of 6.00% p.a. would need to prove they could meet their repayments if their interest rate was 7.00% p.a. APRA's 3% serviceability buffer would require such a borrower to prove they could repay their home loan at an interest rate of 9.00% p.a.

For comparison, here's how the monthly repayments on an average sized home loan - $641,000 as of July 2024 - would differ with such interest rates:

Interest rate (p.a.)

Repayments

6%

$3,843

7%

$4,265

8%

$4,703

9%

$5,158

Figures as per Your Mortgage's home loan repayment calculator.

As the above chart shows, the amount needed to pay off a typical mortgage can change a lot depending on the interest rate a lender charges.

A 3% buffer can disqualify borrowers, even if they could afford to make repayments at the actual rate offered.

Non-bank lenders don't have to abide by APRA's serviceability buffer

In this arena, there's a stark difference between banks and non-banks.

Whether owned by shareholders - like the big four banks - or communities - like customer-owned banks - all entities that are able to hold consumer deposits must abide by APRA's regulations.

Non-bank lenders don't fall into this category. They're not Authorised Deposit-taking Institutions (ADIs) and while they must follow many of the same rules as banks, they don't need to abide by the serviceability buffer.

Take non-bank lender Firstmac, for instance. Firstmac chief financial officer (CFO) James Austin recently told the Savings Tip Jar podcast the lender applies a 2% buffer when assessing a borrower's ability to meet repayments.

That's the case whether or not they're refinancing from a different home loan product.

Is like-for-like refinancing common?

It's hard to pin down just how common like-for-like refinancing is. While many lenders likely lean on the practice on occasion, they have no need to disclose it.

APRA warns banks against making regular exceptions to lending policy, even if doing so could offer relief to mortgage prisoners.

Any exceptions to a bank's standard serviceability rules, including like-for-like refinancing, should be considered on a "case-by-case basis", APRA chair John Lonsdale said in 2023.

"Under APRA's prudential framework, banks can use exceptions to policy if these are managed prudently and limited," he continued.

"This approach allows banks to take into account additional indicators of repayment capacity beyond those captured in the standard serviceability test.

"For a borrower seeking to refinance, this could include past repayment behaviour."

The regulator argues consistent exceptions to lending standards can weaken a bank's risk profile and leave both the bank and the broader economy more vulnerable to shock.

Banks must balance supporting borrowers with ensuring the overall financial system remains stable and resilient, it says.

Image by Tierra Mallorca on Unsplash

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