Trapped on a High Rate? Here's Why You Can't Refinance and What to Do Next
You know your interest rate is too high. You've looked around and found cheaper options. Your repayments are manageable. But when you try to refinance, you get knocked back.
It's one of the most frustrating situations a borrower can find themselves in — and it's more common than most people realise. There's even a name for it: home loan jail.
Here's why it happens, and what you can do about it.
Why You Can't Refinance Even When You're Managing Fine
When you apply to refinance with a new lender, they don't assess you on what you're currently paying. They assess you at your new interest rate plus a 3% buffer on top. This is called the serviceability buffer or assessment rate, and it's required by APRA, the banking regulator.
So if you're looking at a new loan at 6%, the lender will check whether you could still afford the repayments at 9%. The idea is to make sure you could handle rate rises in the future.
On the surface that sounds reasonable. But here's the problem.
If you took out your loan when rates were lower and rates have since risen, that 3% buffer pushes the assessment rate very high. You might be comfortably making repayments at 6.5% right now, but when a new lender assesses you at 9.5%, the numbers don't work and your application gets declined.
The result is that borrowers who have never missed a payment, have stable income and would genuinely be better off with a lower rate, can find themselves stuck with their current lender because they can't pass the test to leave.
The HEM Benchmark Makes It Worse
On top of the serviceability buffer, lenders also apply a living expenses benchmark called the Household Expenditure Measure, or HEM. This is a standardised estimate of what your household is expected to spend based on your income, location and family size.
Lenders use whichever is higher, your declared expenses or the HEM. And the HEM has increased in recent years as cost of living has risen, which means lenders are assuming you spend more than you might actually spend.
Add the HEM to the 3% buffer, factor in any other debts you have like HECS, car loans or credit cards, and the borrowing capacity a new lender will give you can be significantly lower than what you'd expect based on your actual financial position.
We've written a detailed explainer on how lenders assess borrowing capacity, including the HEM and serviceability buffer, which you can read here.
So What Are Your Options?
Not everyone in this situation is completely stuck. Here are the main options worth exploring.
Ask your current lender to review your rate.
Some lenders have retention teams and pricing tools that allow them to reduce your rate without you needing to refinance at all. They rarely do this unless you ask, or unless you've made it clear you're looking elsewhere. It's worth starting here because it costs nothing and takes a single phone call or email.
Look at lenders with a lower serviceability buffer.
Not all lenders apply the full 3% buffer in every scenario. Some lenders, particularly non-bank lenders, are able to apply a reduced buffer of around 1% in certain circumstances. This can make a meaningful difference to your assessed borrowing capacity and may open up refinancing options that weren't available through the major banks.
This is one of the areas where working with us makes a real difference. We know which lenders are more flexible on serviceability and can match your situation to the right option before anything is lodged.
Consider a 35 year loan term.
Some lenders now offer loan terms up to 35 years. A longer term reduces your minimum repayment, which can improve how a new lender assesses your borrowing capacity. You can always make extra repayments once you're in the loan, but having a lower minimum can be the difference between qualifying and not qualifying.
Zeus Bolt — Built Specifically for This Problem
If you've explored the options above and you're still stuck, there's a product worth knowing about called Zeus Bolt.
Zeus Bolt is a refinance product available exclusively through LMG brokers, including us, that was specifically designed for borrowers who are trapped on a higher rate but can't pass the standard serviceability test to refinance elsewhere.
The key difference is how it assesses your application. Instead of the standard 3% buffer, Zeus Bolt uses a 0% buffer for eligible borrowers. That means if you're refinancing to a lower rate, you're assessed at the new rate itself rather than the new rate plus 3%. For borrowers who are stuck because of the buffer, this can be the difference between being declined and being approved.
We've written a full post on how Zeus Bolt works which you can read here. Here's a simplified breakdown of the eligibility criteria:
You need to have held your existing home loan for at least 12 months with a good payment history and no significant arrears.
Your LVR needs to be 80% or below, meaning you need to have at least 20% equity in your property inclusive of any fees and charges on the new loan.
The new loan must have lower repayments than your current loan. Zeus Bolt is designed for borrowers who would genuinely be better off after refinancing, not for those looking to cash out or increase their debt.
You need a clear credit history, with a minimum Equifax credit score of 600.
You need to be an Australian citizen or permanent resident, or in some cases a temporary resident. Companies and trusts that have been established for at least 24 months are also eligible.
The loan must be for owner-occupied or investment purposes, with loan amounts up to $3.5 million, or up to $1.5 million for the rapid refinance option.
You cannot currently be with ColCap Financial Group or Origin MMS, as Zeus Bolt cannot be used to refinance loans already managed by these entities.
One of the other advantages of Zeus Bolt is speed. Eligible loans can settle in as little as 48 to 72 hours through the rapid refinance process, which means if you qualify, you could be on a better rate very quickly.
A Simple Example
Here's how the difference in assessment plays out in practice.
Imagine you have a $700,000 loan currently at 7%. Your repayments are around $4,650 per month. You find a new lender offering 6%, which would drop your repayments to around $4,200 per month, saving you around $450 a month or $5,400 a year.
Under the standard assessment, the new lender assesses you at 9% (6% plus the 3% buffer). At that rate, the repayments would be around $5,600 per month. If your income and expenses don't support that, you don't qualify even though your actual repayments would be lower.
Under Zeus Bolt, you're assessed at the actual new rate of 6%. The repayments used in the assessment are $4,200, which you've already demonstrated you can afford given you're paying $4,650 right now. That's a much more straightforward case to approve.
Is This Right for You?
Not everyone will qualify for Zeus Bolt, and it won't be the right solution for every borrower. But if you've been told you can't refinance despite making your repayments comfortably, it's worth a conversation.
We can review your situation, check whether you meet the eligibility criteria, and let you know whether Zeus Bolt or another option is likely to work for you, before anything is lodged on your credit file.
If you'd like to find out more, get in touch today
