What is a mortgage prisoner?
A mortgage prisoner is basically someone who holds a mortgage but is currently stuck with their actual lender.
Often, the factors that can cause someone to be stuck include things like:
- a drop in property values which makes switching lenders more costly fee-wise
- a significant increase in interest rates that ultimately results in higher assessment rates, making it harder for borrowers to prove they can actually service (cover the costs of) their loan, or
- changes in personal circumstances such as a new job or change in income
What is particularly important to keep in mind is that although borrowers might comfortably be meeting the repayments of their existing loan at a high-interest rate, they might not be able to refinance and access a home loan or investment property loan with a better rate. This is what ultimately keeps them stuck with their lender as mortgage prisoners.
But… why does this happen?
Why do people get caught in a mortgage prison?
The root cause of why many Australians could now find themselves stuck with their existing lender in a mortgage prison is often a much higher assessment rate.
When you approach a bank to take over an existing mortgage, you need to prove to the bank that you can pay that mortgage.
Banks calculate this by looking at whether you would comfortably be able to cover the repayments of your mortgage at the current rate plus an additional average of 3%, which they add on top of the qualifying rate you would be getting.
It is often this assessment rate that makes it so difficult to refinance or switch lenders and secure a lower interest rate, as the level it is actually being assessed at, is significantly higher than the one you could currently be meeting your repayments at!
What are the consequences of becoming a mortgage prisoner?
Besides not being able to have any choice whatsoever in terms of staying with your existing lender of making the switch some of the consequences that come with being a mortgage prisoner include:
- knowing there are better rates out there that you can’t really access
- being unable to ease some of the pressure on your living expenses through potential savings that could come from refinancing your loan, and
- not receiving the best options and offers from your existing lender, as they might not be working as hard to keep your loyalty. They know you won’t be going anywhere as it is not really an option!
Ultimately, you will end up paying much more than you really should in the long term!
How can you avoid the mortgage prison?
Now that we have a clear picture of what being a mortgage prisoner is like, we would love to share with you our top 4 tips to avoid and stay out of the mortgage prison.
Tip #1 – Review your liabilities:
Have you been thinking about getting a new car or perhaps renovating? It might be best to hold-off on that idea!
Taking on additional debt at this point in time will only hurt your borrowing capacity, placing you at higher risk of becoming a mortgage prisoner. Choosing to delay these expenses can make a massive difference when it comes to succesfully meeting the assesment rate of new lender with a better rate if you do choose to refinance in the near future, ultimately saving you money!
Tip #2 – Build on your savings:
If you are in the capacity to do so, building on your savings can place you in a better position when it comes to meeting the assesment rate test!
Having some savings working for you as a buffer can be what marks the difference between having your refinance approved or declined. Small sacrifices in the short-term can make a difference in helping you secure a lower rate! Which would be healthier for your finances in the long-run.
Tip #3 – Keep an eye on the expiry date of your fixed rate:
Have you been making the most out of repaying your loan at all-time-low fixed rates secured during previous years? If so, it is very important that you keep an eye out on the expiry date of your fixed rate.
Chances are that when your rate does expire, you may be facing a significant increase in your repayments as interest rates are now at a much higher new-normal.
Keeping an eye on when this might be happening can help you plan for the future and if possible make the most out of what is within your control: the present!
Things like increasing your repayments whilst on your fixed rate can save you money long-term. Building a saving buffer whilst on your fixed rate can help increase your borrowing capacity to protect your flexibility and choice. Ultimately, working with an expert who can guide you through these decisions to find out what will work best for your financial circumstances can ensure you make the best choice! Which brings us to…
Tip #4 – Work with your dedicated Rise High broker!
Having someone who keeps your best interests at heart and is working for you and not the lender, is more important now than it has ever been!
Working closely with your dedicated Rise High broker to ensure any financial decisions you make truly align with your dreams and goals, or coming up with an actionable plan to avoid becoming a mortgage prisoner if you feel at risk, will keep you safe.
Your Mortgage Broker can also support you by negotiating with your existing lender on your behalf to ensure your rate remains competitive, or help you explore alternatives with other lenders that might look into your financial circumstances more favourably.
Assesment rates are one of the main indicators banks keep in mind when approving a loan. Nonetheless, lenders often treat aspects like living expenses and servicing differently, which means you could still be in a position to access a better rate. Having these discussions with your broker will ensure you can take into consideration different options and alternatives to find the one that is right for you.
Looking into paying down smaller debts, or exploring debt consolidation, can also make a big difference to improve your borrowing capacity! Our team at Rise High can gladly help you assess these through our fee-free service!
What else can you do to protect your flexibility and choice?
If you have considered our top tips and still feel at risk, there are other things you can (and really, should!) consider to keep your flexibility and choice.
Keep a great conduct
A lot of people tend to underestimate the impact that keeping a great conduct by meeting your repayments on time and avoiding going into overdraft can have.
If all else fails, protecting your credit file to ensure you are still a good borrower in the eyes of your lender (and others!) should be one of your key priorities.
Start planning earlier!
And how can you ensure you keep a great conduct? Well, planning earlier can be a great start!
Having a plan in place to ensure you are ready regardless of changes that can happen in the market can put off the pressure and keep your mind at ease. Working with your Rise High broker to truly tap into your key financial dreams and goals, will allow us to guide you in the right direction.
Ultimately, we are here to serve you! If becoming a mortgage prisoner is something you are currently worried about, speak to our team of award-winning brokers to ensure we can help and support you in navigating this situation. You can also learn more about home loans or property investment loans.
We look forward to hearing from you, so we can share our very best advice and expertise!