The number of Aussie ‘mortgage prisoners’ is set to rise, according to Mozo research

In the midst of variable home loan rate changes across a number of banks, it’s safe to say many Aussies may be re-considering their current home loan.

Recent Mozo research has revealed that due to the change in lending criteria, thousands of Aussie homeowners are soon likely to become ‘mortgage prisoners’.

A mortgage prisoner is a homeowner who is unable to refinance their home loan because they would fail to meet the current lending requirements by banks - even if they previously had made every repayment on time.

“Stricter lending criteria was introduced for good reason, with skyrocketing household debt, poor income growth and historically low interest rates. The flow on effect is 30% of owner occupier borrowers are now finding themselves facing mortgage stress – and many are also falling into the mortgage prisoner’ category,” explained Mozo property expert, Steve Jovcevski.

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And according to Jovevski, it’s those who need a new loan the most the that will be hit the hardest.

“The sad reality is borrowers who need competitive mortgage rates to stay financially afloat are most likely to be mortgage prisoners,” he said.

In the past, banks used a ‘one size fits all’ approach, or a ‘house expenditure measure’, to assess a prospective homeowner’s borrowing capacity. This meant that modest expenses were estimated regardless of a borrower's income, resulting in inflated amounts being lent.

Bank lending is now based on a borrower’s personal income and expenses and at the moment, lending criteria is being tightened. That means some of those borrowers who took out a loan before the stricter measures came into place are effectively stuck with their current loan and have to pay whatever rate their lender sets.

“When a customer is essentially tied to a provider, they are at the mercy of whatever rate rise or conditions the bank chooses to impose. Given the current situation, banks have the power to hold some of their customers prisoners. With the big banks under the same funding pressure as smaller lender, more hike rates are imminent,” said Jovcevski.

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What the average mortgage prisoner might look like

Take for example, a couple with one dependant and a dual income of $120,000 who purchased a home in 2013, borrowing $800,000. At an interest rate of 5.00%, their monthly repayments are $4,295, leaving them with $3,680 to pay for other monthly expenses.

Now let’s say five years has passed, the couple’s combined salary has jumped to $129,000 and they’ve had another child. They’re also still paying the same amount each month with $734,600 left to pay off on their current uncompetitive home loan rate of 5.00% - but are now looking to refinance to another lender offering a rate of 3.80%.

When the couple first applied for their loan, the bank used a poverty line index to estimate their expenses with a 1.5% buffer to ensure the couple would meet their repayments should rates increase.

But the new bank would now use their actual monthly expenses, say $4,000 per month and apply a 2% buffer to protect themselves against rate rises. Thanks to these new lending standards, the couple would only be permitted to borrow $680,000. This means that they no longer have the ability to refinance and are at the mercy of any rate hikes from their lender.

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How much would they have been able to save?

If the couple were able to refinance onto the 3.80%, they may have been able to save a whopping $149,272 over the life of their loan, or a massive $500 a month.

However, it’s not all bad news for mortgage prisoners, as Jovcevski believes it is still possible for homeowners to work with what they’ve got.

“If you’re finding yourself ‘stuck’ with your bank, consider other ways to improve an uncompetitive rate. Whether it’s contact your existing lender and pushing hard for a lower rate or talk to a non-bank lender that may be willing to take you on as a borrower, there may be ways to slash thousands off the cost of your loan,” says Jovcevski.

In fact, Mozo research found that nearly 70% of borrowers who haggled on their home loan were able to slash an average of 50 basis points from their rate and save $1,218 in interest per year.  

So if you’d like to haggle your way to a better home loan deal, have a read of our haggling tips guide before having a play with our home loan comparison tool to compare some of the current deals on the market.