Are you feeling trapped in an expensive home loan, unable to refinance to a more competitive interest rate? You’re not alone. Approximately 16 per cent of households with a mortgage in Australia find themselves in a “mortgage prison,” facing strict serviceability rules that hinder their ability to refinance. However, there may be a way out, and we’re here to assist you.
What is Mortgage Prison?
Mortgage prison occurs when you lack the equity or fail to meet the serviceability requirements, known as the “stress test,” to refinance your home loan. Consequently, you become bound to a mortgage that may no longer be affordable for you.
What is the Serviceability Buffer?
The serviceability buffer is designed to ensure borrowers can comfortably repay their loans under various scenarios, such as interest rate increases or changes in income and expenses.
In 2021, the Australian Prudential Regulation Authority (APRA) raised the minimum interest rate buffer that lenders must consider when assessing home loan applications, from 2.5 to 3 percent. This means that borrowers must demonstrate the ability to meet repayments at an interest rate that is at least 3 percent higher than the loan product rate.
There has been mounting pressure on APRA to ease the serviceability buffers for refinancers, aiming to address the mortgage prison situation. While APRA maintains that its serviceability guidelines are appropriate, they have expressed willingness to adjust policies if there is a risk to financial stability.
Why are More People Finding Themselves in Mortgage Prison?
Unfortunately, a combination of factors has led to an increasing number of borrowers being trapped in mortgage prison.
Firstly, we have witnessed an unprecedented series of interest rate hikes since May 2022. This has impacted serviceability buffers, as lenders need assurance that borrowers can handle higher repayments if interest rates continue to rise.
Moreover, property prices have declined in many markets over the past 12 months, causing a drop in homeowners’ equity.
Additionally, the fixed rate cliff situation has emerged. Australians who took advantage of historically low fixed rates now face significantly higher interest rates as their fixed rate terms expire.
In short, many borrowers find themselves in mortgage prison, struggling with expensive mortgage repayments but unable to refinance due to the 3 percent serviceability buffer.
How We Can Assist You As your mortgage broker
- Investigate alternative lenders who may be willing to work with you.
- Negotiate with your current lender, seeking a lower interest rate, exploring options to reduce loan fees, and considering financial hardship assistance.
- Offer suggestions to enhance your serviceability, such as reducing living costs or increasing your equity by paying down more of your principal.
- Assess the status of your credit report, as it plays a crucial role in your loan application.
- Explain the potential benefits of debt consolidation to improve your financial position.