NAB joins rivals in liberating borrowers from ‘mortgage prison’ with new refinancing exceptions

The bank will introduce refinancing exceptions allowing eligible customers to switch lenders and access relief from strict regulatory requirements.

The prudential regulator prohobits banks from offering mortgages to borrowers who can’t repay a loan with a hypothetical interest rate 3 percentage points above the loan’s actual interest charge. Britta Campion/ The Australian

National Australia Bank will begin welcoming home loan borrowers trapped in so-called “mortgage prison” with good credit histories from July 21, following in the footsteps of similar moves by rivals.

With many borrowers that entered into home loans carrying interest rates at a fraction of current levels finding it difficult to meet strict regulatory standards to refinance their loans, Commonwealth Bank, Westpac and a number of non-bank lenders have announced similar policy changes in recent weeks.

In a memo to bankers and mortgage brokers, NAB said it will be making exceptions to strict regulatory requirements on a case-by-case basis for “like for like” refinancings of principal-and-interest loans only.

“With refinancing high on the agenda for many homeowners, we will be refreshing our existing approach to support eligible refinance customers switch to NAB,” the email says.

It adds the exceptions will be for those borrowers “considered a good credit risk but may not fully meet standard lending criteria, including serviceability buffers.”

The prudential regulator prohibits banks from offering mortgages to borrowers who can’t repay a loan with a hypothetical interest rate 3 percentage points above the loan’s actual interest charge.

It means that a borrower seeking a mortgage with an interest rate of 6 per cent would have to show their income is sufficient to repay the loan as if it carried a 9 per cent interest rate.

The rule allows exceptions, however, and banks are using those to capture as many new customers as possible.

In May, the Australian Prudential Regulation Authority (APRA) said Australia’s banks had expressed an appetite to approve around 6 to 7 per cent of the flow of refinancings under the rule exception.

Top financial regulators have recognised borrowers are finding it increasingly difficult to refinance their mortgages but have said the banking watchdog’s decision not to lower the bar was appropriate in a climate of soaring loan costs and high inflation.

To be eligible NAB will require new customers to have over 20 per cent of equity in their home and have a good repayment history on their current mortgage.