Navigating refinancing and overcoming bank barriers

Refinancing remains one of the biggest financial moves Australians are making in 2025, with more than 100,000 households switching loans in the last quarter alone.

But while falling interest rates are creating opportunities, the real factor shaping whether borrowers can move to a sharper deal is the way banks assess serviceability.

When lenders process a refinancing application, they don’t just look at what a borrower can afford at today’s interest rate.

They add a buffer, typically three percentage points, to ensure households could handle repayments if rates rise again.

With standard variable rates for owner-occupiers sitting in the mid-5s, many Australians are being tested at close to 8.5 per cent, a hurdle that has left thousands struggling to qualify for the deal they want.

Christian Stevens, CEO of mortgage brokerage Flint, said the impact of these buffers has been stark.

“We regularly see clients who are comfortably meeting their repayments but can’t pass the banks’ serviceability tests,” Stevens said.

“A family on a $150,000 household income may have $150,000 to $200,000 less borrowing capacity than they did in 2021. For investors, the gap is even bigger because their existing debt is also assessed at these higher buffer rates.”

The rules, set by the (Australian Prudential Regulation Authority) (APRA), were designed in 2019 to protect households from overextending during periods of strong credit growth.

When rates were at record lows, the three-percentage-point safety margin made sense.

With rates far higher, the gap between what borrowers can actually afford and what banks will approve has never been wider.

One shift that has given borrowers some relief is the way refinancing is assessed compared to new lending.

Most banks now apply only a one percentage point buffer for refinancers, a change that has opened the door for Australians previously stuck in so-called “mortgage prison” to switch lenders.

“That one per cent buffer has been a lifeline for many homeowners,” Stevens said.

“It means people who were locked into uncompetitive loans can now refinance and ease cash flow pressures. Without that change, thousands would still be trapped with higher repayments.”

Even with the looser rules for refinancers, Stevens said the choice of lender is now just as important as the rate itself. Some banks apply harsher expense assumptions, while others take a more flexible approach to existing debt.

The difference can be substantial.

“It’s not unusual to see borrowing capacity vary by six figures depending on which bank you go to,” he said.

“That’s why advice and preparation are critical, borrowers can’t assume every lender will assess them the same way.”

The serviceability squeeze is also influencing the property market. Reduced borrowing power is pushing buyers toward smaller homes and different suburbs, while investors are stepping back, changing the composition of demand. Sellers, in turn, are adjusting pricing expectations.

There is also a growing debate about whether APRA should revisit its buffer settings. Stevens believes a modest adjustment could help strike a balance between financial stability and accessibility.

“Even reducing the buffer to 2.5 percentage points could give households an extra $50,000 to $80,000 in borrowing power,” he said. “For many, that’s the difference between getting approved or missing out.”

Stevens said refinancers need to take a more strategic approach, preparing thorough documentation, comparing lenders carefully, and considering how their loans are structured.

“The buffers are guardrails designed to protect the system, not a reflection of a borrower’s discipline,” he said.

“The key is to work within the rules and use them to your advantage. With the right lender and preparation, refinancing is still one of the most powerful tools Australians have to manage their mortgage in 2025.”