A mortgage prisoner typically refers to an individual holding a mortgage who faces the inability to refinance their home loan. This predicament is unrelated to their creditworthiness as a borrower but is instead attributed to factors like serviceability and property security.
To elaborate, serviceability pertains to one’s capacity to repay the debt. The recent series of consecutive rate hikes has had a significant impact. Even if a borrower managed to secure a competitive interest rate, lenders must apply a serviceability buffer of 3 percentage points above the advertised rate. As a result, if a borrower’s income has changed or expenses have risen – which is common due to the increasing cost of living – they may no longer meet the serviceability requirements of a new lender.
In essence, the lender would assess the borrower as unable to comfortably manage the loan repayments. This is seemingly absurd since the borrower is likely paying a higher rate with their current lender, which is why they considered refinancing in the first place.
On the other hand, the security aspect depends on the time of the property purchase and the property price fluctuations in the area. If property prices have dropped, causing the loan-to-value ratio (LVR) to exceed 80%, the borrower may discover that refinancing is not feasible without incurring costly Lenders Mortgage Insurance (LMI). Such an expense is undesirable for any borrower, especially during times of high living costs and rising interest rates.
If you are considered a mortgage prisoner, don’t stress as there are options to get you out of mortgage prison. If you would like to find out more information please contact me.