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Leading brokers say “mortgage prisoners” are emerging, but only a few clients are affected and lenders are addressing the problem by adjusting their product policies.
Everlend director Evelyn Clark, Boss Money owner Tom Uhlich (pictured above left) and Elite Finance Australia owner Matthew Posselt have all seen some signs of “mortgage prisoners” as interest rates have continued rising in 2023.
The problem occurs when a client previously met loan servicing criteria, but due to interest rate rises and declines in equity, they are unable to meet the criteria to secure a new, cheaper loan at another lender.
Clark said she had started to see “a couple of clients” who weren’t able to service their loans as new-to-bank customers, despite being diligent in meeting all of their current mortgage commitments.
“Unfortunately, there have been some, whereby the interest rate rises have outweighed any pay rises, or reductions in the loan, and they have been ineligible for a refinance,” Clark said. “While the majority of our clients looking to refinance have been OK, for those who borrowed at their maximum borrowing capacity two years ago, I believe this may become more apparent.”
Posselt said that, in his customer base, there was evidence of some mortgage prisoners, who are unable to refinance to better rates due to both rate rises and the 3% serviceability buffer.
He added that an increase in the Household Expenditure Measure (HEM) by some lenders, which measured borrowers’ living expenses, was also contributing to the problem with refinancing.
However, Posselt and other brokers say it’s only affecting a small number of clients at present, and that the biggest wave of mortgage prisoners are likely to come as cheap fixed rate loans expire.
“Customers who have taken out cheaper fixed rate loans may be at risk if they are unable to refinance to a better rate when their fixed rate term ends,” Posselt said.
“It is not a problem at the moment,” Uhlich said. “I believe most of this will occur in September and October when the majority of our clients come off low fixed rates.
Uhlich said that his assessment was that three clients “won’t service on the new servicing rates”.
Australian Property Finance mortgage and finance specialist Daniel Gilbert (pictured above right) said that, at this stage, the brokerage had not seen much evidence of refinancing clients being trapped with their existing lenders.
“I believe this is due to combination of most being at low LVRs following the last few years of rapid price increases and also the fact that the serviceability buffer has been in place for some time,” Gilbert said.
Clark said there were more often positive cases where a client’s financial circumstances had advanced, due to new jobs, pay rises, increased rental income or paying down their debt.
“This has meant they are not impacted by the rises, or the positive changes have cancelled out the increased servicing requirements,” Clark said. “For the majority of our clients, I have found this to be the case.”
The brokers noted that lenders such as ANZ and NAB had moved to offer simplified refinancing policies. These did not require full serviceability assessments for borrowers already successfully servicing an existing mortgage, as the market moved to head off the mortgage prison problem.
“There are a couple of lenders that have brought out policy to assist these clients,” Uhlich said. “No income documents required, mainly using repayment history. The term ‘mortgage prisoner’ has also been added to NCCP regulations.”
Gilbert said broker proactivity was also ensuring that clients stayed ahead of the mortgage prison problem.
“While we have hundreds of clients about to come off an average of 2% fixed rates and be welcomed to a potentially 6% to 8% variable rate by their current lender, we are finding that if we remain proactive in our approach to negotiating lower rates with their existing lenders in the first instance, we are saving any hassle for the client and getting great outcomes,” Gilbert said.
“In the event that the existing lender won’t come to the party, we have a number of other options for our clients in the 5%’s that we can switch them to – some of which will give them $4,000 cashback as an incentive as an added bonus. We have found that by being proactive in advance our clients are well looked after the way they should be.”
Clark said one of the great improvements she had seen over the last two years was bank repricing tools.
“Many lenders now have an instant repricing portal that allows brokers to request improved rates on behalf of clients,” she said. “We request these approximately every six months in the back-end for our clients. If a better rate is granted, the pricing is applied relatively quickly, without the clients needing to do anything.”
However, because not all banks have this technology, Clark strongly suggests that brokers remind clients to be on the front foot themselves to ensure they are on the best rate.
“They should be calling the banks every six to 12 months to request they match new-to-bank rates available with their lender. By staying on top of their rates, they may find they can achieve the same results as a refinance within a short phone call, rather than an entire new application.”
A bigger problem than refinancing has been a reduction in the amount borrowers can borrow.
“The main problem we are having are those that were pre-approved three to six months ago are now having to reduce their purchase expectations as their borrowing power has dropped significantly,” Uhlich said. “Most have to start looking at smaller properties or downgrade from a house to apartment. One had to cancel a purchase contract.”
Gilbert said prospective first home buyers who “have been saving like crazy” to obtain their deposit to get into the market were being left behind on borrowing capacity.
“There’s no doubt that for clients wanting to refinance and borrow more money the amount they can obtain is around 30% less than what they could borrow this time last year,” Gilbert said.
“Every 0.25% rate rise has equated to approximately a 2.5% reduction in capacity. So if you were a first home buyer able to borrow $500,000 in April 2022, you are now looking at being able to borrow around $312,000 and you may have been priced out of the market. No wonder there is a rental shortage.”
Gilbert said Australian Property Finance would continue to be proactive in reviewing clients’ loans – especially for those nearing the end of their fixed rate periods – to negotiate a better rate.
In some instances, Gilbert said clients were receiving cash incentives to remain with their current bank as a reward for their loyalty.
“We also have our finger on the pulse with the best alternatives on offer so we can ensure our clients are presented the choice of our 30+ lenders,” he said.
Are you seeing any problems with mortgage prisoners being unable to refinance to cheaper loans? Share your thoughts or stories on this topic in the comments section below.
