Borrowers trapped in ‘mortgage prison’ hit with $389 extra cost: ‘Defies logic’

Mortgage holders could be locked into high interest rate loans and unable to refinance following a ruling by the banking regulator. This could leave some borrowers stuck paying hundreds of dollars more each month than they should be.

The Australian Prudential Regulatory Authority (APRA) announced it is keeping the 3 per cent buffer that banks are required to apply when assessing loan applications. The regulator raised the serviceability buffer from 2.5 to 3 per cent in October 2021 to protect borrowers when the cash rate was at a record low of 0.1 per cent.

Canstar analysis shared with Yahoo Finance found the buffer could be creating a roadblock for existing borrowers trying to refinance to a lower home loan rate and lower their repayments.

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Existing borrowers repaying a $600,000 loan over 30 years with an average rate of 6.37 per cent who apply to refinance to a lower rate loan of 5.89 per cent, would be assessed at a rate of 8.89 per cent once the buffer is applied.

Refinancing could potentially save the borrower $186 per month. If the borrower was refinancing from the average market rate of 6.88 per cent, the savings would be even greater at $389 per month.

But if the lender determined they weren’t able to service a loan with the buffer added at 8.89 per cent, the borrower would be declined for the 5.89 per cent loan and unable to refinance. That’s despite them already repaying their loan at a higher rate.

Are you a mortgage holder struggling with higher rates? Contact tamika.seeto@yahooinc.com

Canstar group executive of financial services Steve Mickenbecker said he understood why APRA maintained the buffer for new lending, but said it didn’t make sense for those refinancing.

“What they’re effectively doing is locking people into high interest rate loans potentially so that’s not helping system stability at all,” Mickenbecker told Yahoo Finance.

“People are already in that situation and refinancing to a lower rate is actually improving their situation, not worsening it … It defies logic.”

A borrower earning the average Australian income of $98,218 a year is currently spending 46 per cent of their income on an average 6.37 per cent home loan.

Mortgage payments have risen by more than $1,500 a month on the average $600,000 loan since the RBA began its rate hiking cycle in April 2022, leaving many borrowers eager for relief.

Borrowers stuck in ‘mortgage prison’

Mortgage brokers have warned there is a growing number of borrowers stuck in a “mortgage prison” and unable to pass serviceability tests to refinance. It found serviceability was the number one barrier to refinancing.

A recent survey from the Mortgage and Finance Association of Australia (MFAA) found 84 per cent of brokers had clients unable to refinance, a slight rise from 82 per cent last year.

“We have heard repeatedly from our members about clients who are good borrowers, with a strong repayment track record, being unable to refinance simply due to buffer rates,” MFAA CEO Anja Pannek said.

“This is even when the client’s repayments would actually decrease if they were to switch lenders, trapping more Australians into a mortgage prison.”

Last year, Commonwealth Bank announced it would be lowering its serviceability buffer from 3 to 1 per cent for eligible refinancers. Westpac and NAB also announced they would relax their tests for certain refinancers.

MFAA found these moves had made it “somewhat easier” for borrowers to refinance but strict eligibility requirements made it difficult for some to access.

ANZ CEO Shayne Elliott has also proposed cutting the 3 per cent buffer and said regulators were “locking out middle Australia” from being able to access home loans.

When announcing its decision to hold the buffer at 3 per cent, APRA chairman John Lonsdale said he was concerned the level of overall risk to the financial system “remained elevated” with high levels of household debt and inflation still above the RBA's target range.

“Given the uncertain economic and interest rate outlook, including the possibility of higher cost-of-living pressures, it is important that prudent buffers are incorporated in serviceability assessments,” he said.

“APRA will continue to monitor closely bank lending standards and the broader operating environment and should we believe a change in macroprudential settings is necessary, we will make the appropriate adjustments where needed.”

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