Reason #1: Serviceability Issue
When obtaining a home loan, the loan amount a bank or lender grants hinges on various factors. Alongside your loan-to-value ratio (LVR) and credit score, you’ll likely come across the term “serviceability.” It is the bank’s way of evaluating your capacity to manage a home loan successfully. This involves scrutinising your income and expenditures and other considerations to ascertain the feasible amount you could comfortably allocate for repayments.
Now, there’s another term involved, and it’s called “serviceability buffers”. They are an additional precautionary measure banks use when assessing your ability to repay your mortgage. These buffers are designed to provide a safety margin that accounts for potential future interest rate increases or changes in your financial circumstances. Simply put, they act as a cushion to ensure you can still afford your mortgage repayments even if interest rates increase or unexpected financial challenges arise.
Serviceability buffers used by banks, being at a higher rate now than 3 or 5 years ago, are a major serviceability issue at the moment. There are calls for banks to slash their serviceability buffers, and in fact, CBA and Westpac, two of the Big Fours, were quick to adhere as of June this year.
Reason #2: Valuation Issues
Remember, the value of your property can go up and down. It can change over time because of property market trends in your location, economic conditions, interest rates, home features added or altered, government policies in your state, infrastructure and development near you, and many more. These shifts play a role when you’re considering refinancing your mortgage. Why?
This is because when you refinance, the bank will check if your property’s value is sufficient to rationalise the “new home loan”. They want to make sure that your home can function as a security or collateral in case you defer on your home loan repayments.
If your property’s value has diminished and you still owe a lot in your current mortgage, then you can be denied to refinance.