We’ve seen some pretty extreme headlines in the media lately saying up to 4 in 10 Australia borrowers is a “mortgage prisoner”. Cutting through the hysteria – what does this mean and what is the lending and banking landscape actually like right now?
Now we aren’t going to rehash all the regulatory changes that have affected the finance industry over the past 3 years. Reason being, we have written a lot about this and I’m sure you have read all our previous updates (for more check out LinkedIn, we’ve written quite extensively on this here).
The reality in 2018 is that getting your home loan approved is becoming increasingly difficult. With all these new lending changes and coupled with peoples changes in circumstances, Aussies are getting stuck with one lender because they no longer meet the criteria with other lenders to refinance, aka you become a ‘mortgage prisoner’.
Who’s at risk of becoming a mortgage prisoner?
1. You hold multiple investment properties with all or majority of your debt being interest only.
Why are you at risk? If you want to extend your interest only period, it’s not as easy as the old days to make a phone call to the lender to push it out another 5 years. Nowadays, you need to do a brand-new application to show serviceability and that is not just with a new lender you are looking to refinance to, but your existing lender who you have been with for years.
Due to serviceability issues, you will see that investors can’t afford the new principal and interest repayments and may be forced to sell.
2. Your owner-occupied property is set to interest only repayments.
Why are you at risk? You may have purchased a property before you had kids or purchased when one of you was on maternity leave. As money may have been tight with only one income or you knew one income was about to be lost, you may have chosen the flexible option of just paying interest only.
Remember, only 3 years ago the interest rates were the same and interest only wasn’t such a dirty phrase like it is today.
This strategy of interest only may have worked for some, but others who got used to these all-time low rates and just meeting their minimum repayments, will get a shock when their lender says it’s time to pay off this debt. Some lenders even have a policy that you can only do a maximum of 5 years of interest only for an owner-occupied property. Other lenders won’t even let you do interest only on owner occupied anymore.
If the timing is not right; maybe you’ve have just had a baby, your income is not high enough to service or you have just started a new business and we can’t use your income, then you will be stuck where you are.
3. The value of your property has decreased.
Why are you at risk? If the value of your property has fallen and you haven’t paid off much of the principal of the loan, you may find the bank doesn’t want to lend to you at a higher loan to value ratio (LVR). For most people this shouldn’t be an issue as the downturn hasn’t been that significant so far and hasn’t impacted prices across all areas within the market (here in Melbourne at the time of writing).
4. You are nearing retirement.
Why are you at risk? Yes, you read that right. There are some lenders who are becoming very hesitant to over longer loan terms to older borrowers, irrespective of a strong financial position. Older borrowers are being required to take much shorter loan terms and device increasingly complex exit strategies to prove their ability to pay the loan off by the time they reach retirement.
Is there light at the end of the tunnel if you are a mortgage prisoner?
Yes, as even if you are stuck with your lender you will have options. These options would be:
- Renegotiate the interest rate they have first offered you
- Consider a fixed loan over variable as we are seeing some much lower fixed rates than variable at the moment (especially for investment)
- There may be another lender to consider your situation. We have over 40 lenders that we can do loans through and like to explore all options
We believe it’s always good to have options when it comes to your home loan, it’s what we’ve built our business on: choice! There are ways you can help get yourself in the best state financially before you look at applying for a new loan or refinancing your existing – get in touch and we can give you a hand with your financial fitness.