Escaping mortgage prison

Stuck in an expensive home loan and feeling trapped?

You’re not alone. It’s estimated about 16 per cent of households with a mortgage are in a “mortgage prison”, unable to refinance to a more competitive interest rate because they can’t meet strict serviceability rules.

But there may be a way out. And we can help.

What is mortgage prison?

A mortgage prison is when you lack the equity or can’t meet the serviceability requirements (the “stress test”) to refinance your home loan. As a result, you become shackled to a mortgage you may no longer be able to afford.

What is the serviceability buffer?

The serviceability buffer is designed to help ensure borrowers can afford to repay their loans in a range of scenarios – if interest rates go up or if their income or expenses change.

In 2021, the Australian Prudential Regulation Authority (APRA) increased the minimum interest rate buffer it expected lenders to use when assessing the serviceability of home loan applications from 2.5 to 3 per cent. That means that borrowers taking out a loan must be able to meet repayments at an interest rate that is at least 3 per cent higher than the loan product rate.

There has been growing pressure on APRA to relax the serviceability buffers for refinancers to help address the mortgage prison situation. APRA has said its serviceability guidelines remain appropriate but it would adjust their policies if there was a risk to financial stability.

Why are more people landing in mortgage prison?

Unfortunately, a perfect storm of factors has landed many borrowers in mortgage prison.

Firstly, we’ve seen an unprecedented amount of rate hikes since May 2022. This in turn has affected serviceability buffers (lenders need to be sure prospective borrowers can withstand higher repayments should interest rates continue going up).

And with property prices falling in many markets in the last 12 months, many homeowners have seen their equity plunge.

Then there’s the fixed rate cliff situation. Australians who secured loans during the period of all-time low fixed rates are now confronting substantially higher interest rates as their fixed rate terms expire.

Long story short, many borrowers are now finding themselves in mortgage prison, grappling with costly mortgage repayments but unable to refinance due to the 3 per cent serviceability buffer.

How we can 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. We’re here to help.

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About Southstead Finance

Southstead Finance provides personal lending advice and solutions for home buyers and investors who want the freedom to live the life they want.

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