Have you heard of the phrase “mortgage prison”? Are you:
- trapped in expensive home loans Gold Coast deals with high interest rates;
- unable to switch to more affordable loans due to strict affordability tests;
- feeling helpless and stuck, with little hope of improving your financial situation?
Chances are, you could be in a mortgage prison yourself. While taking out a mortgage is often a necessary step towards achieving the dream of homeownership, a combination of the least unfavourable circumstances could send homeowners to mortgage prison.
Let us take a closer look at what a mortgage prison is, how it can happen, and most importantly, how to escape it. I will provide practical advice and guidance to help homeowners take control of their finances and weather the storm during this cycle of high mortgage rates in Australia.
TALK WITH PHILMore and more homeowners are refinancing their home loans
Refinancing activity has seen a spike in 2022 during the start of the RBA cash rate hikes. In 2023, refinancing value soared to $19.9 billion or 2.7% in February this year, according to the latest Australian Bureau of Statistics lending data. It rose to 14.9% over 12 months.
The trend in external refinancing of housing loans is going on an upward slope at a much faster pace than new lending. In fact, the former may very well soon overtake the latter, the value of which currently sits at $22.6 billion — a 30.9% drop over the 12 months to February.
Why refinance?
More people are refinancing their mortgages due to the increasing number of low fixed-rate home loans taken from the Australian mortgage marketplace in 2020 and 2021, which are now on the verge of expiring.
Worries over inflation and concerns about further rising interest rates on homes are the main reasons why this is the case. Another reason is the fact that refinance rates generally more competitive than existing home loan rates. Lenders tend to offer better interest rates and terms to encourage you to refinance with them.
What does this suggest?
Given the current economic climate, it is worth considering refinancing your home, even if you haven’t made plans to do so yet.
But what if you are unable to refinance?
Then mate, you could be in mortgage prison. Let’s delve into this pressing issue.
What is mortgage prison?
A mortgage prison refers to a situation where a borrower is unable to refinance their mortgage, leaving them trapped on a high or average interest rate.
This can occur due to several reasons, including:
- a decline in the value of their property, leaving a homeowner with less equity and a high loan-to-value ratio (LVR);
- being too old to refinance (folks over 50 years old may find it harder to refinance)
- stricter serviceability standards (the Australian Prudential Regulation Authority (APRA) increased the home loan buffer to 3% from 2.5%)
- reduced borrowing power due to rising cost of living and/or stagnant income levels
- having poor credit scores from missed repayments
- the anxiety over transitioning to a higher fixed Australia mortgage rate when the current term ends
8 Ways to avoid or escape mortgage prison
To avoid or escape mortgage prison, here are five things you can do:
1. Evaluate your financial health
Reviewing your budget and expenses can help you identify areas where you can cut back on spending, which can free up funds to pay down your mortgage or other debts. This can help improve your financial situation and make it easier to qualify for a new loan with better terms.
2. Get rid of your other debts
Reducing your other debt, such as credit card debt or personal loans, can improve your overall financial situation and make it easier to qualify for a new mortgage. This can also free up more funds to put towards your mortgage repayments.
3. Increase your household income
Finding ways to increase your household income, such as taking on a side job or negotiating a pay raise, can help improve your financial situation and manage your monthly repayments.
4. Cut down your credit card limits
By reducing your credit card limits, you can decrease the amount of debt you have, which can improve your debt-to-income ratio and make you a more attractive borrower to lenders. You can also avoid overspending and accumulating more debt this way.
5. Ask for a better loan term
Requesting a new, longer loan term can lower your monthly repayments and make it easier to keep up with your mortgage repayments. However, a longer loan term means you will pay more interest over the life of the loan, so carefully consider whether this option is right for you.
6. Consider interest-only payments
Moving to interest-only repayments can reduce your monthly repayments, but it’s important to note that you will still owe the principal at the end of the term.
7. Contact your bank for hardship assistance
If you are struggling to keep up with your mortgage repayments, contact your bank to see if they can offer hardship assistance. This may include options such as a temporary repayment holiday or a loan modification.
8. Reach out for debt counselling
Seeking advice from a debt counsellor can help you develop a plan to manage your debts and improve your financial situation. They can also provide guidance on how to avoid getting trapped in mortgage prison in the future.
You can try reaching out to the National Debt Helpline (NDH) for guidance.
Manage your home loan with Professional Lending Solutions
If you feel any kind of hardship related to your mortgage, don’t hesitate to contact me and my team. We will help you explore your options and find a solution that works for your unique situation.
