How many Australians are stuck in mortgage prison?
With the June official interest rate rise now being passed through to those with mortgages, the number of households stuck in mortgage prison is only going up.
So, what do we mean by mortgage prison and how many people are stuck there and is there a way they can escape this prison early?
They are all intriguing questions and some of the answers will only become apparent over time, but some solutions are slowly coming into focus.
Stuck with current lender
Firstly, mortgage prisoners are households who simply can’t qualify for a new loan, meaning they are stuck with their current lender.
That means even if there are much lower interest rate loans on offer in the market, the combination of the 3% mortgage buffer and the size of their loan relative to the value of the property and their income makes changing lenders practically impossible.
That makes mortgage prison a particularly hard place to be, given that your loan repayments might be punishingly high but going to an alternative lender to reduce those repayments is simply not an option.
That means the usual route of calling the bank and asking for a reduction in your ongoing mortgage rate with the threat of switching lenders has no real teeth at all – you might get a hearing and it is worth a try but one short look at the file is going to tell the bank that there is little chance of the switch threat being carried out.
One in four loans to prisoners
As to how many people are trapped in mortgage prison, the non-specific answer is absolutely heaps.
Even though there is a very large amount of refinancing happening at the moment and the mortgage scene is highly competitive, that doesn’t directly relate to the mortgage prisoners – many of whom took out their loans when official interest rates were just 0.1% and the Reserve Bank was indicating that they would not be rising until 2024 at the earliest.
Barrenjoey analyst Jonathan Mott pointed to a survey of mortgage brokers which found that 24% of their customers would end up in mortgage prison.
That’s a lot of people and the brokers should know – their whole business relies on knowing who they can target to switch to a cheaper loan.
For now, the mortgage prisoners will start to drop off their lists of people to call, even if they have been exemplary customers.
Rate rises and price falls could swell prison numbers
There are factors that could swell the number of households in mortgage prison much more – one would be further interest rate rises which is certainly a high probability of happening and another would be a fall in the value of their property.
Property prices are obviously fluid and current price rises are a bit perplexing as the economy weakens and rates keep rising but there are certainly some observers who point to the current rises as being temporary and liable to reverse later this year as bad loans and forced sales begin to rise.
Like all predictions, nobody knows for sure but in the case of housing, the thing that matters is the prices in the area that the mortgage prisoner has a house.
Localised price rises might help to bring forward a release from mortgage prison because they improve the loan to value ratio (LVR) and the possibility that another lender will be able to make the numbers work for a refinance, even after applying the 3% serviceability buffer.
Obviously, localised price falls work in the opposite direction.
Planning a jail break
So, is it possible to escape from mortgage prison early and how would you go about it?
Well, the first thing to realise is that there is nobody in your corner fighting for you to escape.
The Australian Prudential Regulation Authority (APRA) has made it clear that banks should not try to break mortgage prisoners out of pokey by offering them loans.
Bankers had hoped that there might be some flexibility to offer loans with perhaps a lower serviceability buffer, not unlike the, in retrospect, totally unrealistic 2.5% buffer that applied during the surprising late 2021 house price boom.
Officials not coming to the rescue
APRA chairman John Lonsdale has been very firm on this, telling Senate estimates that the 3% buffer was “the right number” because of the uncertain economic outlook.
He followed that up by writing to banks warning them that they should resist the temptation to help mortgage prisoners swap to cheaper loans, saying that any bank writing a large number of loans to borrowers who failed serviceability tests would face tougher scrutiny.
To reinforce that stance, the Council of Financial Regulators, which includes the RBA, ASIC, APRA and Treasury, backed the 3% buffer as well.
The RBA are also laser focussed on getting inflation lower and will not be swayed from that course – indeed, tight financial conditions among households is the very thing they are relying on to contain and reduce inflation.
That leaves the focus on getting out of mortgage prison squarely on the shoulders of the borrower and there are some things they can do to stage an early jail break, although it will not be easy.
How to dig a tunnel
Firstly, they should get out of the way the ranting about the unfairness of their predicament – which is certainly a justified emotion – and make a plan to dig a tunnel out from their current imprisonment.
No amount of complaining about broken Reserve Bank promises will change the situation you are in.
One thing to do is to remain on good terms with your current financial institution.
If you are going to be stuck with them for some time, try to make the prison as comfortable as possible.
Maintaining mortgage payments, even if that is incredibly painful, is important in keeping the current institution onside and ready to at least give a good hearing to any pleas for a lower or more competitive mortgage rate.
If maintaining payments becomes impossible and there is no prospect of help from family, blowing the whistle early and contacting the institution for hardship assistance is vital.
Banks really don’t want bad loans or forced sales and will genuinely try hard to avoid them if at all possible.
There are things they can do like making the loan interest only for a time, extending the loan term or organising lower payments for a while but these options tend to dry up if you have already maxed out the credit cards and are juggling a range of high interest personal or credit card loans.
Look for a side hustle
Increasing income is never easy but it could be vital in getting over the serviceability hump and coming out of the other side as fast as possible.
If at all possible, paying down the loan a little faster than the schedule or stowing any spare cash in an offset account if you have one are both things that will improve the situation over time, even if it seems like small drips extracted from an ocean of debt.
It is also worth keeping in contact with a mortgage broker who may be able to indicate lenders that could help in your particular situation.
Some lenders have ways to make what are called policy exceptions, although such exceptions will only be able to help a small percentage of mortgage prisoners.
Both Westpac and Commonwealth have indicated they may be able to help some prisoners get out of jail by applying a 1% buffer instead of a 3% one but that is heavily conditional.
For a start, the customers must not have missed any repayments and then they must be able to service the loan and they will generally end up with a 30-year loan.
Longer loans have lower repayments but last longer so while they are cheaper to service in the near term, you end up paying a lot more if you keep the loan going for the entire journey.
It’s going to be a long grind
There are no easy solutions to what for many will become a real struggle and long-term grind to remain in their house and service the mortgage but Australians have historically shown that they are very good at pulling every lever they have to remain in their house.
Given the terrible and highly competitive state of the housing rental market at the moment, that is just one more incentive to buckle down and slowly work your way towards a release date from mortgage prison.