Growing number of borrowers in ‘mortgage prison’

Serviceability buffers need to be reconsidered, brokers say

Growing number of borrowers in ‘mortgage prison’



Finance brokers in Sydney have said successive interest rate rises, higher serviceability buffers and decreases in property values are combining to cause some borrowers trouble with refinancing their loans – even when the loans they would switch to would be cheaper for them to service.

Borrowers are increasingly encountering so-called “mortgage prison” problems as interest rates have increased, meaning they are effectively being trapped in more expensive existing loan facilities because they do not tick all of the necessary boxes for a cheaper refinance deal.

This can happen when they are stress tested at a higher buffer rate than they were during the ultra-low rate environment in which they took out their loan, or because property price falls cause their LVR to rise above 80%, which means they would now need to pay lenders mortgage insurance.

One estimate from Jarden chief economist Carlos Cacho suggested as much as 15% to 20% of the market could be trapped in “mortgage prison” after the last rate rise from the RBA, and that 30% of borrowers who bought during the recent boom would be exposed as property prices fall.

Sydney broker Chris Brown (pictured above left), the managing director of New Vision Financial Services, has seen the problem affecting first home buyer borrowers who may have borrowed as much as they could when rates were low, including those who were now facing the “scary” prospect of coming off low fixed rates.

He said other borrower types were also affected, including mum and dad buyers who may have upgraded their property and borrowed what they could for reasons like getting into a good school zone, and investors, who were also dealing with higher rates, sometimes in interest-only facilities.

“For example, first home buyers that bought at the peak of the market using government incentives, were assessed at a lower serviceability rate, and maybe bought at a 90% LVR, well they may be able to service their loan but their property prices have reduced,” Brown said.

Ray Ethell (pictured above centre), managing director at Non Conforming Loans, said servicing buffers had also become a barrier to clients who were looking to transition from a non-conforming loan to a prime loan.

“Often a client that is currently making repayments at 2% or 3% above a prime rate will not service for a refinance to a prime loan rate, despite the benefit to the client being substantial and the risk to the lender being negligible,” Ethell said.

PFS Financial Services director Daniel O’Brien (pictured above right) said he was not seeing the problem a lot among his client base at present, but that it was a legitimate problem. He said it was everyday “meat and potato” clients that bought between 2020 and 2022 who would be most affected.

“These borrowers were spoilt by cheap COVID bail-out rates and now they are facing the normal reality. To a newer, uninitiated borrower, 5% has been shocking. To a more experienced campaigner, it’s a return to the ‘norm’,” O’Brien said.

Brown said brokers were faced with the task of telling clients they are unable to save them money.

“We are telling these clients that unfortunately the framework we have combined with legislation and lender policies is one that we have to adhere to, and while we may not necessarily agree with the situation, there is nothing we can do about it,” Brown said.

“We tell them we want to see them save money, we want to assist them – and at the end of the day we don’t get paid if we don’t help them – but after we go through everything, collecting all their documentation, it’s often a waste of their time and ours as we can’t do anything.”

‘Mortgage prisons’ not in clients’ best interests

The FBAA recently said it would look at serviceability rates as part of its agenda this year. Brown said he expected the problem would get worse not better if interest rates rise as expected this year, and that the industry as a whole should look at the issue on behalf of clients.

“For people who have already got a loan, have never missed a payment, and are in a position to save money, how is it in the best interest of the client if they can’t do a like-for-like refinance because they don’t tick a box when it comes to a serviceability buffer?” Brown said.

“If they are low risk – they have a loan, and are paying for it – and have 12 months’ history with their current lender, and are maybe below a certain LVR threshold, we might need to look at a change that would enable a like-for-like refinance at something like their current rate.”

Ethell agreed the industry and ASIC should look at the way refinance and debt consolidation deals were being assessed. “It may be time to assess these on benefit to the client rather than using ‘buffers’ that impose mortgage imprisonment on borrowers," he said.

O’Brien said lenders had already started to solve this problem by making adjustments to their refinancing policies, meaning that “there are solutions that have recently been brought in that are massive game changers” for clients that may be facing a mortgage prison.

He pointed to ANZ removing the need for income verification on refinance deals for PAYG applicants, and a move from Bankwest to accept self-supplied pay slips from self-employed borrowers as income verification in lieu of tax returns or accountant income verification.

“Like always, problems equal solutions. Now more than ever, it’s important brokers are across these policy niches and enhancements,” O’Brien said. “It is harder now, but going back to where rates should’ve always been isn’t the end of humanity as we know it.”

Common-sense criteria should be applied, he said. “As an example, if a client wants to do a dollar-for-dollar refinance and it saves them money and reduces their repayments; don’t ask them for any income verification paperwork. This has been implemented by a bank already.  But I think more banks have a great opportunity to write good business and help everyday Australians.”

These deals were low risk and good business for banks, O’Brien said, as long as they could see a clean credit report, there was an LVR under 80%, repayments on the new loan would be lower than the old loan, and the current mortgage conduct of the client is perfect.

O’Brien said current interest rate rises are just getting back to a more normal level.

“Let’s not forget the blessing that COVID was in relation to our interest rates. Rates should never have been as low as they were. Rates getting as low as they did was a part of our COVID bailout. So the greater majority of recent rate hikes is just getting us back to where we were pre-COVID.”

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