Tighter lending means 'mortgage prisoners' on the rise
Thousands of Australian mortgage holders are likely ‘trapped’ with their current lender, due to tighter lending restrictions, the comparison site Mozo has found.
It leaves them unable to negotiate or refinance their home loans.
“A mortgage prisoner is a homeowner who is unable to move to a more competitive mortgage deal, even if they’ve met every repayment, because they would not pass new affordability tests applied by the banks,” says Steve Jovcevski, Mozo property expert.
"Typically, this is because they took out the loan before stricter lending rules applied.
“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.
"The sad reality is borrowers who need competitive mortgage rates to stay financially afloat are most likely to be mortgage prisoners.”
He noted there had been generous lending standards in the past, that was now up against rising cost of living and stagnant wages.
"With an increase in interest rates likely to grow over the next few years this group is predicted to grow, meaning a large group of banking customers will be effectively 'stuck' with their bank.
“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,” says Jovcevski who gave an example of how mortgage prisoner arose.
He nominated a couple with one dependent and a dual income of $120,000 who purchase a home in 2013, borrowing a total of $800,000.
Their monthly repayments are $4,295 which leaves them $3,680 to manage their other expenses.
Fast forward five years, the couple now has a combined salary of $129,000 and they've had another child.
They're still paying the same amount each month, have $734,600 left to pay off, and would like to refinance to another bank that’s offering a rate of 3.8% rather than staying with their current uncompetitive home loan rate of 5%.
When they first applied for their loan the bank used a poverty line index to estimate their costs ($3,276 per month) with a buffer of 1.5% to ensure the couple could meet their repayments if rates increase.
The bank now uses their actual monthly expenses which they’ve assessed as being $4000 per month, and applies a 2% buffer to safeguard themselves against rate rises.
With the new criteria the couple could only borrow $680,000, so do not have the ability to refinance their loan, leaving them at the mercy of any rate hikes from their bank.
"If this family was able to refinance to a competitive rate of 3.8%, they could potentially save $149,272 over the course of their loan.
"Due to the loan assessment changes they are unable to refinance to their desired lender,” says Jovcevski noting the banks used to assess potential homebuyers seeking a loan using a ‘house expenditure measure’.
It now looks at the applicant's income and annual expenses - this is everything from utility bills to Netflix subscriptions to monthly beauty treatments.
"Previously, a ‘one size fits all’ approach was applied, with modest expen ses estimated regardless of income, resulting in inflated amounts being lent to hopeful homebuyers."
