Trapped in mortgage prison

Are you a mortgage prisoner?

Are you trapped in an expensive home loan with no means of escape?

According to the Reserve Bank of Australia (RBA) there are around 16% of households with a mortgage in “mortgage prison”, and unable to escape and refinance to a better rate. With the recent rate increases many home loan borrowers are unable to meet the stricter assessment rates and serviceability requirements.

What is mortgage prison?

You can find yourself in a mortgage prison in a couple of ways: exceeding the loan to value ratio (LVR) by not enough equity in your property and when your income does not meet the serviceability assessments. Both of these can find you trapped in a mortgage that you cannot afford.

Serviceability buffer

When a borrower is assessed for their borrowing capacity lenders use a serviceability buffer. It’s a “stress-test” to assist in countering any potential changes to the interest rate (higher), or changes in personal income and expenses.

Buffers were increased in 2021 when the Australian Prudential Regulation Authority (APRA) increased the minimum interest rate buffer from 2.5% to 3%. The change ensured that borrowers must be able to make repayments 3% higher than the actual loan product rate.

APRA has come under pressure to review the buffers and make it easier for borrowers to switch lenders to get a better deal. APRA has so far resisted and said its serviceability guidelines remain appropriate but it would adjust their policies if there was a risk to financial stability.

More mortgage prisoners in the coming year

You may have heard of the “fixed rate cliff”. Recently, the Australian Bankers Association (ABA) released data showing that more than 600,000 Big 4 bank customers will come off a low fixed rate this year and will see rates increase by more than 4%. Many of those borrowers are first home buyers and may find themselves in mortgage prison.

Nationally property prices have also been falling in the last 12 months, meaning many homeowners have seen their equity diminish.

The reality for many borrowers is that they will be in a position where switching lenders will not be an option as their new borrowing capacity will not be enough to cover their existing loan.

We are here to help

As your mortgage broker, we can:

  • Investigate whether there may be other lenders out there who might take you on.
  • Negotiate with your current lender. We may be able to request a lower interest rate, investigate other options like reducing your loan fees and applying for financial hardship.
  • Suggest ways to improve your serviceability. For example, you may be able to reduce your living costs or pay down more of your principal and increase your equity.
  • Find out how your credit report is looking. This is an important piece of the puzzle with a loan application.
  • Explain whether debt consolidation could help get you into a better financial position.

If you’re feeling trapped by your home loan and want to explore your options, get in touch today.

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