Breaking Free from Mortgage Prison: Hope for Australian Borrowers

## What is Mortgage Prison?

Mortgage prison occurs when borrowers find themselves unable to refinance to a better interest rate, despite faithfully making their current payments. The core issue lies in the Australian Prudential Regulation Authority's (APRA) 3 percent serviceability buffer, which requires borrowers to prove they can make payments at a significantly higher rate than their current one.

Here's a practical example: If you're currently paying 7 percent interest on a $500,000 loan and find a better offer at 6 percent, you could save $3,945 annually. However, the catch is that you'd need to prove you can afford payments at 9 percent (the new rate plus the 3 percent buffer) – effectively demonstrating you can not only afford your current payments of $3,326-. But can in effect afford repayments of $4,023- at 9%.

## How Borrowers Get Trapped

The path to mortgage prison often sneaks up on homeowners. Consider someone who borrowed $600,000 on a variable rate three years ago. While they passed the initial stress test, the recent rate increases have caused their monthly repayments to surge from $2,399 to $3,884 – a staggering 62 percent increase.

## The Escape Route: The Little-Known Loophole

There's hope for imprisoned borrowers through an APRA-approved exception. Major banks including Westpac, CBA, and NAB have begun offering reduced serviceability buffers – as low as 1 percent – for qualifying refinancers.

### Key Requirements for the Reduced Buffer:

- Dollar-for-dollar refinancing (no additional borrowing)

- Clean credit history

- Minimum credit score of 800 in some cases

- No credit card payment arrears

- Full documentation of finances

- No recent history of loan hardship

Using the earlier practical example, proving you can afford the new 6% rate plus a 1% buffer means your simply need to prove that you can afford your current repayments based your current 7% rate.

## The Role of Property Values

Property valuations can significantly impact refinancing options. Recent market fluctuations have affected property values, potentially pushing some borrowers into mortgage insurance territory. Importantly, different lenders may assign varying valuations to the same property – in one recent case, three lenders valued the same property at $980,000, $1.05 million, and $1.1 million respectively.

## Working with Lenders

Currently, we work with 13 lenders offering the reduced 1 percent serviceability buffer for refinancing. Each lender has unique assessment criteria, and borrowing capacity can vary significantly between institutions – even with identical financial details.

## Professional Guidance

Working with a mortgage broker can help navigate these options, as we have access to multiple lenders and can identify which ones are most likely to approve applications with favorable terms. We can also help borrowers understand different lenders' criteria and find the most advantageous refinancing options.

## Conclusion

While mortgage prison is a challenging situation, understanding these refinancing options and working with knowledgeable professionals can help borrowers find a path to better rates. The key is meeting the right criteria and finding lenders willing to apply the reduced serviceability buffer.

This information has been prepared by PHA Financial Services and does not take into account your objectives, financial situation or needs. Before acting on this information you should consider whether it is appropriate to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. The information provided was accurate at the time of publication and changes in circumstances after a document is published may impact on the accuracy of information. Some information may have been collated from various third parties and we make no assertion that the information was originally ours.