Collage of people panicking about their home loans.

How to avoid the home loan hostage trap

By · · 7 min read

Quick Facts

  • A home loan hostage is a borrower at risk of mortgage prison.
  • New Mozo research reveals that 75% of surveyed Australians are ‘at risk’ of becoming a home loan hostage
  • Changing jobs, having children, or spending more on your credit card can make you more likely to become a home loan hostage.
  • Nearly half (48%) of homeowners admit they couldn’t afford their current home if they bought it today. 
  • Tactics to avoid becoming a home loan hostage include negotiating with your lender, clearing debt, and reducing your spending months before you want to switch.

Three-quarters of Aussies stand at the gates of mortgage prison

As housing stress grows, new Mozo research reveals that 75% of surveyed homeowners in Australia are at risk of becoming a home loan hostage. 

When your home loan holds you hostage, you can’t easily refinance to ‘escape’ it. Homeowners may not have enough income or equity built up to meet serviceability requirements, so new lenders see them as a red flag. 

Borrowers then find themselves trapped with a costly mortgage that no longer works for them. If the hostage situation gets serious, it could worsen into full-blown mortgage prison.

Not everyone at risk becomes a home loan hostage. However, many Australians don’t understand what puts them at risk in the first place, despite admitting they plan to do things in 2023 that do exactly that.

Little room to negotiate for home loan hostages

“As your life changes, your financial circumstances change,” explains Mozo banking expert Peter Marshall. 

You may have taken on additional debt, such as a personal loan or credit card, or find that falling house prices have reduced the equity in your home.

“Those things can all make it harder to get approval for the same loan that you’ve been approved for previously,” Marshall continues, “making you a virtual home loan hostage.

Woman panics about student loan debt, car loan debt, home loan debt, and credit card debt.

What's a home loan hostage?

A home loan hostage is someone at risk of mortgage prison. They may have lost equity, accrued debt, or changed jobs. 

These risk factors could make refinancing difficult because lenders see them as risky investments.

What's a mortgage prisoner?

A mortgage prisoner cannot refinance their home loan due to extreme financial hardship. This is the worst-case scenario. 

Borrowers may have to default on their repayments, apply for financial hardship, or sell their property.

Woman panics about falling money and property values.

From Mozo bank expert Peter Marshall

If you're finding it difficult to switch lenders, then you could be paying a higher interest rate. And if your current lender is not willing to give you a rate discount, you could be stuck with them and find that you can’t move to a lender now offering cheaper rates.

Man studies a rising graph with bangs of money and books.

Rate hikes tighten the chains

Nine consecutive rate hikes from the Reserve Bank of Australia (RBA) have worsened the home loan hostage crisis.

Mozo found that nearly half (46%) of borrowers worry about increasing mortgage repayments due to rate hikes. 

Almost a third (29%) have cut back on ‘anything fun or extra’ to meet repayments, while 8% have considered selling up altogether.

Every cash rate movement impacts variable home loans.

Variable interest rates lifted 3.25% between May 2022 and February 2023 – more than the 3% serviceability buffer lenders use to assess new home loan applications.


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Goodbye, home equity!

Rate hikes drive price falls in the housing market because fewer people can afford a loan to buy in.

According to Mozo’s survey, 16% of Australian borrowers have been told by their lenders that their loan-to-value ratio (LVR) has risen due to falling property values. 

This means they have lost equity – which can make them a home loan hostage risk.

Home loan hostage risk factors

Certain life decisions can also push you into the home loan hostage trap. 

Anything that increases your debt or decreases your cash flow can hurt your chances of refinancing and trap you with your mortgage

When asked if they expected any of the following to happen in the next twelve months, only 25% of respondents said “no”. This means the rest could be at risk of becoming a home loan hostage.

TIP: A financial advisor can help assess your situation from a long-term perspective.

Price tags attached to a car, phone, and home.

Red flags for home loan lenders

Let’s break down why some common lifestyle decisions can seem like red flags to lenders.

A good rule of thumb is to watch anything that decreases income, increases debt, or eats into how much of your home you own (equity).

Lenders want to see that you have a steady and consistent income to make repayments, no other debts draining your budget, and a relatively low LVR (less than 80%). 

A child depositing money in a piggy bank.

Having a child

For lenders, a new addition to the family means more expenses, less disposable income, and time off work, all of which can complicate your loan application.

8% of respondents said they plan to have a child in the next 12 months.

Woman types on laptop that gives notification

Changing careers

Lenders like to see you’ve passed your probationary period and can show around three months of payslips before they approve you, so changing jobs can throw a spanner in the works.

19% of respondents said they plan to change jobs in the next 12 months.

Woman shops for clothes with her new credit card.

Signing up for a new card

Lenders will consider your entire credit card limit, not just what you owe. So if your limit is set to $15,000, your borrowing power could be reduced by the same amount.

9% of respondents plan to take out a new credit card in the next 12 months.

Woman gives thumbs up with credit score.

Credit score declining

If you haven’t kept up with repayments or other bills, your credit score could be lower and lenders might doubt your ability to service a mortgage. 

4% of respondents expect their credit score will decline significantly over the next 12 months.

Man gestured to loan approved paperwork, money falls.

Buying a car

When assessing your application, lenders will consider any debts you have. Your borrowing power will be reduced if you’ve taken out a personal loan, such as to purchase a vehicle, fund a vacation, or even have a wedding.

5% of respondents said they plan to take out a car loan in the next 12 months.

Woman balances home with hour glass, key and interest rate percentage sign.

Falling property values

Falling property prices are a reality of the current market. If your loan only began recently, this can result in negative equity, which is when you owe more on your property than what it’s currently worth.

19% of respondents believe that the value of their property will fall in the next 12 months.

Could you service your home loan today?

When you apply for a home loan, lenders will stress test your finances by applying a serviceability buffer of around 3%. That means you’ll be assessed on your ability to pay a rate much higher than the one you’re signing up for.

“This way, if the cash rate were to go up by around three per cent, you should still be able to meet your repayment obligations,” explains Mozo banking expert Peter Marshall.

So you’re not only having to qualify for the loan as it would cost you right now, but how much it might cost you further down the track.

Could you afford your home today?

When Mozo asked borrowers if they could afford to buy their home with today’s stricter lending standards and higher interest rates, only a quarter (25%) said yes.

Nearly half (48%) said no, while the rest (28%) weren’t sure.

Man studies paperwork next to his home and calculator.

How to have your cake and eat it too

If you’re planning on making a major life decision this year and are worried about how it will affect your home loan application, you can do a few things to ensure it doesn’t lower your standing in a lender’s eyes.

  • Reevaluate your spending.
  • Consolidate any debt.
  • Negotiate your interest rate.

Did you know you can negotiate your interest rate?

Mozo found that 17% of Aussies didn’t know or didn’t think they could call their lender to negotiate their interest rate. 

A further 50% knew this option was available to them but hadn’t yet picked up the phone to get a better deal.

Woman calls up her mortgage lender.

When negotiating a cheaper interest rate, it pays to familiarise yourself with the rates your lender currently offers new customers. Chances are they'll be lower — after all, new customers have to be enticed. Existing customers just have to be loyal or complacent. 

Call your lender and tell them you’re unsatisfied with your current repayments. Ask if they are willing to match the rates offered to new customers. 

If it comes to it, you can ask for a discharge form to show you really mean business. Most lenders would rather lose some money on interest payments than lose the customer. 


Many factors have made it harder to get a home loan at the moment. A sharp rise in interest rates thanks to the RBA has stung many borrowers, and the rising cost of living has eaten into savings. Affording repayments is now a top priority for Australians with a mortgage.

Rate hikes have also caused declines in property values. While falling prices can be a great window of opportunity for new buyers, it also eats into the equity of recent ones. This loss can make it harder to refinance, putting people at risk of a home loan hostage situation – or worse, mortgage prison. 

However, with little knowledge about what risk factors can trap you with your home loan, homeowners have a fighting chance to avoid it.

Marshall recommends getting ahead of the problem, which means shoring up your finances three to six months before refinancing.

“Do whatever you can to improve your financial situation on paper so that the banks will look at it more favourably,” Marshall urges. 

“It’s something you need to get onto now if you think you might want to move in future.”

Compare home loans through our mortgage hub. Just starting your property journey? Check out our home-buying guides.