Mortgage Prisoner Report 2020: Most Aussie homeowners want to refinance but can’t

Quick facts from our report:

• 29% of mortgage holders who opted for repayment holiday recently lost their job and 16% experienced a pay cut.

• 40% of those on a mortgage holiday were confident they could resume principal and interest repayments while 29% felt they could make interest only.

• A further 27% felt it would be ‘touch and go’ to make either principal and interest or just interest-only payments, while 3% stated they could not afford to make repayments.

• 62% of mortgage holders have concerns about selling their home or foreclosure

• 83% of mortgage holders would like to change lenders. 

• 38% of people intend to make the switch, 45% are unable to due to limited earnings.

• One in ten mortgage holders admitted they didn’t shop around when obtaining a loan.

• By switching from the average to best rate on the market borrowers can save $2631 per year on average.

Introduction: Captives of cost

Many Australians are paying a premium to own their property and for a growing number that high cost has become a bridge too far. In fact, research from the Australian Prudential Regulation Authority in August shows there is $229 billion worth of loans in Australia on temporary repayment deferrals, accounting for around 8.5% of total outstanding loans.

In a year when the economy has been upended, the reasons are simple. Mozo surveyed 3,270 property owners for its latest study and found that 29% of mortgage holders who opted for repayment holiday had recently lost their job and 16% experienced a pay cut.

While there’s a portion of mortgagees who remain unaffected by the economic downturn to this point, it seems the majority of people want to make a home loan switch and refinance. Mozo has found that a whopping 83% of mortgage holders would like to change lenders. Here’s the problem: while 38% of people intend to make the switch, 45% are unable to due to limited earnings.

On the precipice: 27% say paying off their home loan is touch and go

According to the Australian Prudential Regulation Authority (APRA), around 8.5% of all loans in Australia - approximately $229 billion worth - have been put on hold. But the uneven impacts of the economic crisis mean some mortgage holders are better placed to resume repayments than others.

A recent survey conducted by Mozo found that among those who have paused their mortgage repayments, 29% had lost their job and 16% had experienced a decrease in pay. A majority, however, had remained unaffected by the downturn.

When asked about restarting their mortgage, 40% of respondents said they were confident they could make principal and interest repayments, while 29% felt they could just afford to make interest only repayments.

Meanwhile, 27% believed paying off their loan would be ‘touch and go’, and 3% said they would not be able to service their loan at all. For perspective, a 3% default rate across paused mortgages would equate to nearly $7 billion in loans.

These worries have come front and centre as banks contact mortgage deferers to discuss restarting repayments. Depending on their financial situation, borrowers will have to either resume P&I repayments, restructure their loan, extend their mortgage holiday for an additional four months, or sell their property.

Trapped: Defining the mortgage prisoner

So who are Australia’s mortgage prisoners? These are homeowners who are stuck with their current home loan and unable to refinance to a lower rate and make use of the savings that could provide.

This is not down to a lack of desire. In a recent Mozo survey a considerable 83% of mortgage holders said that they would like to change lenders, however, as in many parts of life, COVID-19 has had a devastating impact on the incomes of many Australians. 

Here’s how: 29% of survey respondents reported having recently lost a job, while 16% said that they had experienced a pay cut. As a result, 45% of all of the mortgage holders surveyed are currently unable to switch home loans because of limited earnings. 

And therein lies the problem, and the first reason that some homeowners find themselves in ‘mortgage prison’ - a significant drop in income.

Refinancing is simply taking out a new loan. But lenders need to adhere to responsible lending standards too, so during the process of vetting a new loan application they need to make sure that borrowers can prove that a) they have the income to meet their repayments and b) they’ve got a history of meeting those repayments.

Without being able to meet those requirements, mortgage holders will find it very difficult to refinance.

Another issue which could be born out of the pandemic is a fall in property values, with 66% of mortgage holders admitting that they are worried about a housing equity plummet in the next year.

Why homeowners fear market plunges

Given the slower real estate market of 2020, Aussie mortgage holders are also worried (66%) about a housing equity plummet in the next year, which could propel a potential mortgage prisoners crisis.

Equity is the difference between the current value of your property and the amount you owe on it (if you have a loan), so negative equity occurs when the amount you owe is greater than your house's value. 

Falling equity can be an issue for borrowers looking to refinance, particularly if their loan-to-value ratio (LVR) becomes higher. In most cases as LVRs increase, so do the rates on offer. In a situation where the LVR goes above 80%, borrowers may be forced to take out lenders mortgage insurance - an additional expense which can cost thousands of dollars.  

Among the mortgage holders surveyed by Mozo, 73% believed property prices would plummet (though 39% of that group anticipated a bounce back). Conversely, 21% felt housing prices would remain stable, while a meagre 5% predicted a property price upswing.

Mozo Director Kirsty Lamont says a price plummet could tip some property owners into mortgage prisoner territory, or deepen their inability to switch.

“For mortgage holders seriously concerned about making repayments, it’s only natural that they’d be nervously eyeing the housing market and hoping things don’t slide. The double whammy of foreclosure and plummeting home value is a real concern for many,” said Kirsty Lamont, Mozo Director.

As the figures above show, around two-thirds of mortgage holders in most states reported being concerned about the possibility of falling property prices and the flow on effect that could have on home equity.

That’s particularly true for homeowners in New South Wales (71%) and South Australia (70%), though slightly less so for residents in Western Australia (54%).

Refinance strategy: Tips for property owners

If refinancing seems like a tall order, the first thing you should do is research what’s on offer elsewhere, along with what your lender is offering new customers, and try to negotiate your current rate down. If your lender won’t budge, consider ways you can become more appealing to another one.

One thing to keep in mind is that when lenders assess refinance applications, they pay close attention to a borrower’s recent repayment history. So if your mortgage has been on pause for several months, lenders won’t have much to go by when determining your ability to service a loan.

To get around this problem, would-be refinancers will have to get a few months’ worth of repayments under their belt with their current lender before shopping around. For some, especially those whose financial situations have stabilised since March, this won’t be such a large hurdle.

Beyond this, it’s also a good idea to lower your day to day expenses and focus on tackling any other debt you might have. And when it comes time to find another lender, avoid making inquiries with too many as this might affect your credit score. Instead, do your research upfront and narrow down your options to a select few.

A final note from our report: most homeowners don’t shop around on home loans. As such, they might not even realise the savings that can be had by doing the right research.

For this report, Mozo found that:

• One in ten mortgage holders didn’t shop around when obtaining a loan.

• By switching from the average to best rate on the market borrowers can save $2631 per year on average.

So, if you can get yourself into a stable financial position, there are excellent long term savings to be had by switching your home loan.

In summary, here are some questions to ask yourself:

• How does my current rate compare to the rest of the market?

• What’s being offered to new customers by other lenders?

• Does my recent repayment history look reasonable to a lender?

• Can I also lower my current day to day expenses?

• And, can I lower my overall debt?

• Have I pinpointed just a select few lenders to approach about refinancing?

This report was a collaboration between Niko Iliakis, JP Pelosi and Tom Watson.