A ‘mortgage prisoner’ is basically defined as a borrower who lacks sufficient equity in their home, and/or, cannot prove current loan servicing to enable the refinance of their home loan.
As recently as early June, in a Senate Estimates Hearing, a representative from (APRA) Australian Prudential Regulation Authority which is the regulator for financial institutions, confirmed that there was no intention to reduce the interest rate stress buffer used to determine loan serviceability. In 2021 that buffer was raised to 3%. Borrowers must be able to prove the ability to service a proposed home loan at the applicable interest rate plus the buffer , in addition to all their other existing debt commitments and living needs. Generally speaking, as an example the interest rate being charged to the borrower may be say 5.50%, plus the 3% buffer equals a loan servicing rate of 8.50%.
Despite the above, some lenders have now developed internal policies to identify situations where ‘mortgage prisoners’ can be assisted to refinance their home loans. These are tightly regulated by the lenders and are treated as exceptions rather than the rule. If a borrower does meet the lenders checklist as a ‘mortgage prisoner’, the respective lender may use lower loan servicing buffer of say 1% to 2%. In these situations the four main points that the lenders are looking for are:-
Have the borrowers made their regular home loan payments over the last 12 months?
Will the new proposed home loan payment be lower than the existing loan payment?
Are there any adverse circumstances to the clients financial situation? This could surround income/employment as an example.
The current remaining loan term cannot be extended. If there is say 25 years to run on the existing loan, then the new loan term cannot be extended past 25 years.
Now not all lenders have these policy exceptions in place for mortgage prisoners. It’s another important reason for borrowers to utilise the professional services of a broker who can carefully manager this process and should have access to the lenders that do have these policy exceptions in place. This is particularly important in these times where we have experienced twelve consecutive interest rate rises and existing borrowers on fixed rates are moving from in some cases sub 2%, to say 5.50% or above in variable home loan rates.
Give Michael a call on 02 6583 2211.