Mortgage prison occurs when you find yourself locked into your current lender, often facing a high variable interest rate because you’re unable to refinance to a lower variable interest rate loan offered by other lenders. The rise of mortgage imprisonment emerged as a significant concern in 2023 when interest rates rapidly increased. Unfortunately, many borrowers, especially those who have more recently taken out a new loan prior to the rate rise, felt trapped with their current lender’s higher interest rate.

Causes of Mortgage Prison

Before we can find the solution, we need to first identify the actual causes of your inability to refinance. Here are the most common ones:

1. Failing loan serviceability: you may find that despite being prompt with payments on your current higher-rate loan, a new lender who’s offering a lower rate might deem that your borrowing capacity insufficient to support the same loan amount. This discrepancy often arises due to the standard servicing buffer, typically set at 3% by most lenders. When you initially secured the loan prior to the rate rises, your servicing capacity was sufficient even with the same buffer. However, with the new, higher rates, it’s no longer sufficient.

Solution: Certain banks have introduced refinancing-specific conditions, such as reducing the borrowing buffer rate to 1%. We can assess your eligibility with these lenders and explore options to enhance your borrowing capacity.

2. Changes in Living Circumstances: Shifts in your personal situation, such as change in income, increased household expenses, or higher total credit card limits, could impact your ability to pass a servicing test.

Solution: Take a closer look into these changes to identify areas for improvement, so that you can qualify for that refinance at a better rate with a different lender. A possible mitigation could be whether you’re soon returning to full-time employment (ie. from part time or casual), reducing unused credit card limits, or consolidating high-interest debts. Our team at Navanti Finance are ready to discuss these possible scenarios with you for tailored advice to address your specific circumstances.

3. Property value decreased: A decline in your property value can elevate your loan-to-value ratio (LVR).Most refinancing is only viable when the new loan does not exceed 80% LVR to avoid another costly Lender Mortgage Insurance (LMI) (ie. it’s counterintuitive to pay a huge upfront fee in LMI premium to shave a few basis points off the current interest rate).

Solution: While property value fluctuations are beyond any individual’s control, exploring alternative valuers appointed by different lenders may offer avenues for refinancing. Additionally, if your original loan was obtained under a government scheme – First Home Buyer Guarantee – program, you may qualify for refinancing to another participating lender under the same program which avoids LMI cost.

4. Credit score issues: your credit history significantly influences loan approvals. Past missed payments, defaults, or bankruptcies can hinder your ability to secure refinancing with competitive rates.

Solution: Here at Navanti Finance, we always suggest starting at the main root cause of a problem before beginning to plan on how to fix them. We can assist you in going through your credit report and if you suspect any suspicious activity in your credit report, it is important that you immediately contact the lister to contest its validity and request it to be removed if proven that it’s wrong. This can help mitigate the impact on your credit score immediately. In a genuine case of missed repayments or defaults due to financial strains, consider debt consolidation/restructure that is focusing more on getting manageable repayments in the short term, to avoid further negative impact on your credit score. Our team at Navanti Finance is ready to provide you with the right guidance and support in selecting the right lender and loan products that can provide you with the best outcome. By taking proactive steps to address credit score challenges even during the most challenging time, you can plan forward towards a brighter financial future.

5. Expiring Fixed-Rate Terms: As fixed-rate term ends, the loan will transition to the now higher variable rates, with significant jump in the monthly repayments.

Solution: Even if you took the low fixed rate loan during those periods in 2020 – 2021 where fixed rates were significantly lower than variable rate, most likely your lender at the time was assessing your borrowing capacity based on the higher variable rate, not the lower temporary fixed rate. So refinancing to those selected lenders with limited ‘1% servicing buffer’ as described above on point 1 remains a possibility.

Ready to Break Free?

You don’t need to feel trapped in a ‘mortgage prison’ situation if you can find the right solution for your refinancing barriers. Empower yourself with the knowledge and tools needed to break free from mortgage prison by reaching out to our team in Navanti Finance. We’re here to guide you every step of the way.