Aussie mortgage prisoners share Trump’s problems with valuations

US Presidential candidate Donald Trump is not the only person getting in trouble over inaccurate property valuations.

While one part of Trump’s many legal problems came about because of property valuations that were way too high and used to get bigger loans at cheaper prices, the issue in Australia is the reverse.

While real estate values have been largely rising or holding steady around Australia, depending, of course, on the state and location, the valuations banks and other lenders are putting on properties is a very different story.

Going from fixed to variable can be very painful

Due to the COVID period of ultra-low interest rates and rapidly rising prices, a lot of eager buyers got themselves into a pickle with low fixed rate home loans that have now reverted to variable loans with rapidly rising interest rates – some to crippling levels even above 10%.

That is a tough position to be in when most variable home loans are around the 6% to 7% range.

While borrowers in that situation would normally contact a mortgage broker or shop around themselves to change their loan to one with a cheaper interest rate, many with high loans relative to their property valuation have found themselves very securely locked in a high interest “mortgage prison.’’

Many lenders have softened valuations

Escaping from that prison is very difficult given that valuations used by many lenders have softened considerably, which makes swapping loans very expensive and difficult.

That is particularly the case if the original loan was on top of a “tight” deposit – say just above 20% of the purchase price mark which means the purchase didn’t require expensive lender’s mortgage insurance (LMI).

That can mean that the new loan they might be offered comes with a lower interest rate but also with the hefty extra cost of LMI, which wasn’t required the last time around.

As the name suggests, lenders mortgage insurance covers the lender rather than the borrower, which is why so many people object to having to pay thousands of dollars for it unless they really have to.

LMI requirement can keep borrowers in mortgage prison

However, if the new valuation comes in too low and LMI is required, that can totally use up any savings to be had with the lower interest rate and leave the home owner in mortgage prison, paying above the odds for their loan.

The only other choice is to keep trying different lenders in the hope that one will come in with a higher property valuation with a more reasonable interest rate to break out of mortgage prison and save some much-needed cash every month.

Sometimes valuations can vary by quite large amounts between different lenders, reaching hundreds of thousands of dollars in some cases.

A recent survey of 440 mortgage brokers found that 84% have clients in “mortgage prison”, slightly more than the 82% in 2023.

Buffer rates can also keep borrowers in prison

Another factor that can leave borrowers stuck in “mortgage prison” is the fact that lenders are required to assess whether new borrowers could service their mortgages if rates were to rise another 3%.

These so called “buffer” rates are stopping many people from refinancing even if they are good borrowers with a strong repayment record.

That must be frustrating, given that repayments should the refinanced loan be granted would be much lower, greatly improving the borrowers chances of maintaining a good repayment history and reducing financial risks.