Escaping Mortgage Prison

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.

Max Tyers
January 19, 2024
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How much does it cost to refinance?

With so much movement on interest rates lately and roughly half of all fixed-rate loans expiring this year, refinancing is on many people’s radars.

It’s no wonder. Some of those facing their fixed rate expiry are bracing for a 63 per cent increase in their monthly mortgage repayments. If you fall into this category, you may be wondering how much it costs to refinance. Let us break down a few of the typical costs for you.

Costs to consider when refinancing:

1. Mortgage application fee

If you’re switching lenders, you will likely have to pay a mortgage application or establishment fee. This covers the cost to your new lender of processing your application.

This upfront cost usually ranges from $200 to $1000, depending on the lender and the type of loan. It may or may not include a valuation fee.

2. Loan discharge fee

Saying farewell to your current lender will likely result in a discharge fee for the administrative costs associated with terminating your mortgage.

Often loan discharge fees are around $200-$400. However, they can be up to $1000.

3. Property valuation fee

Your new lender may require a valuation to be done when assessing your refinancing application. The cost largely depends on the lender and the location of the property – expect to pay more for rural properties. Some lenders offer free property valuations.

4. Break fees

If you are on a fixed rate loan, you may have to pay break fees to get out of it early. Break costs can be expensive and complicated to calculate.

The easiest way to understand your break costs is to ask your current lender for a rundown.

5. Settlement fee

Remember paying a settlement fee when you originally took out your loan? You’ll be up for that again if you decide to refinance.

Settlement fees are paid to the new lender to settle the loan and typically range from $100 to $400.

6. Mortgage registration fees

The land registry in your state or territory will charge a mortgage registration fee to register your mortgage on the title record for the property.

The cost could be anywhere from $120 to $210.

7. Exit fees

The Federal Government got rid of exit fees from 1 July, 2011—but this is only for contracts signed after this date. If you signed before then, you may pay exit fees for ending your loan early. Check with your lender if you’re unsure.

How much refinancing can save you:

While all of the costs mentioned above may seem overwhelming, it’s important to consider the long-term benefits of refinancing.

How much you could save by refinancing depends on the size of your mortgage, how many years you have left on the loan, how much lower the new interest rate is and whether it has interest-saving features.

Like to discuss your options?

As your finance broker, we can help you decide whether refinancing is the right move for you in the current economic climate. We can help you weigh up the costs versus the benefits of refinancing and explain whether a different loan could better suit your financial situation and goals. Get in touch today.

Max Tyers
January 19, 2024
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