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.
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.
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.
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.
As a leading mortgage broker in Adelaide and surrounding suburbs, we can help you
If you’re feeling trapped by your home loan and want to explore your options, get in touch today. We’re here to help.