Mortgage Prisoners
An ominous heading... and a serious topic.
Mortgage prisoners is a term coined to reflect borrowers who are paying a higher than necessary interest rate and are unable to refinance. You could also hear us refer to it as 'rate jail'. The data from the Jarden Group suggests 20-30% of borrowers are in this position currently. Its reflective of what we are seeing, where approximately 20-30% of current mortgage holders approaching us for a refinance are unable to switch loan.
How does it happen?
There are a number of factors at play - which includes increased costs, lower valuations and changes in lender assessment criteria
The assessment rate the banks use to "test" your affordability for a loan is set by the regulators at a minimum of 3% above the current interest rate on the loan you're seeking. This means the assessment rate, or servicing rate, is currently around 7-8% whereas when these borrowers took out their loans it might have been closer to 5.5%
Living expenses have changed. What you're currently spending on your basics like groceries, fuel and power has increased - this isn't news to you. Your reported living expenses or the minimum average expenses the banks use has also risen. In cases we saw this minimum expense level mean a reduction of $20,000 in borrowing power overnight with a change in October.
You may not have the equity to refinance. First home borrowers particularly who bought in the more recent years may have borrowed up to 95% of the value of their home and it either isn't possible or doesn't make sense to refinance and pay mortgage insurance again. Which isn't to say all values have dropped, we've seen some surprising results - both good and bad.
Changes in your own personal circumstances. Any new borrowing, new children, change of job can impact your potential to borrow even the same amount that you currently owe - and presumably are comfortably repaying
Points 1 & 2 fall under the provisions of the responsible lending act which mandates a lender must ensure borrowers can afford their loan with consideration of all of their expenses and commitments at an interest rate which allows for future rate movements.
And, given we have as at now seen 2.75% increase in the official cash rate, we are now at the point where those borrowers who took out loans when interest rates were lowest are approaching the level it was deemed was their maximum and it is showing. Coupled with the actual increases in living expenses we have a double effect.
Why it seems difficult to understand
Its this last point, if you're comfortably repaying a loan at a higher interest rate it seems ludicrous you can't qualify for the same loan with a lower interest rate, We hear you. There's plenty of argument for a "replacement finance" option within the responsible lending provisions - and in fact the legislation was before senate last year to relax these but it was blocked for the wrong reasons. Its something as an industry we are raising at all levels.
Who is this hurting most?
First home buyers with less equity, single applicants who are carrying the entire household burden, investors with greater debt levels, low income borrowers and those on pensions etc.
Additionally there is a large group of borrowers who took out the fabulous fixed rates on offer during Covid and these are due to expire shortly.
What can you do if this is you?
Firstly, assess your capacity to refinance and if possible and it makes sense do so sooner - the one exception being if you are still enjoying a fixed rate starting with a 1 you need to weigh up the benefit of refinancing now vs losing a year or so of this delicious saving.
If you cannot refinance, then renegotiate. We have had great success in seeking additional discounts for our clients and are happy to assist.
Finally, and it feels churlish to say this, make any possible changes to improve your situation - reduce unnecessary debt, reduce expenses, increase income via salary increases (we hear they are on offer).
If after this you are facing hardship do communicate early with your lender and see what additional support they can offer.
