Time to read : 3 Minutes

Have You Become A Mortgage Prisoner

Right now, homeowners on an average mortgage of $600,000* is paying $846 a month more than they were in April.

😱 Interest rate increases aren't over yet. Reserve Bank governor Governor Phillip Lowe had this to say about inflation and has signalled the rise in cost-of-living is far from over.

"A further increase in inflation is expected over the months ahead, before inflation then declines back towards the 2–3 per cent range,"

🔒 This creates a situation where an increasing number of homeowners are becoming "mortgage prisoners" and can't get access to a better, lower interest rate.

How do you avoid becoming a mortgage prisoner?

Falling property prices, rising interest rates and high inflation has created a situation where lenders see you as too much of a risk to refinance and you can't get access to a better loan rate.

👋🏽 Here are some key indicators that you could be in mortgage prison.

• If you are a recent buyer or your deposit is under 20% then banks may see you as more risky.

• You have cut all your discretionary spending – going out for dinner, holidays, buying shoes for the sake of shoes – and are now down to only paying for your essentials.

• The equity of your home has fallen, meaning that you bought your home for $1m but it is now worth $850,000, a loss of $150,000.

• Your debt to income ratio has reduced. For example, a bank was happy to lend you $750,000 when you purchased your property, but now the most you can borrow is only $600,000, locking you in with your current lender.

• If you are eating into your savings to pay your living expenses or have no buffer left at all.

How do you get out of mortgage prison?

Compare Club's home loan expert Anthony Stevenson suggests some simple strategies to help you manage or get out of mortgage prison.

1. Speak to your broker or lender about what options you have – you could go to interest-only repayments, negotiate for a better in-house interest rate or take a temporary freeze on your mortgage.

2. Liquidate assets – the secondhand car market is very hot right now, so it could be an effective way to reduce your costs and get a buffer boost.

3. Share – if you are able to, you could consider renting out a spare room (but beware of the tax implications).

4. Downsize – aka cutting your loses and sell, reinvesting in a smaller property or renting in the interim. It's not a pleasant scenario but could help in the short-term if your finances are really stressed.

5. Find an additional income stream or ask for a pay rise – both these things could increase your borrowing power making it possible to refinance.

Be aware: Brokers often have access to rates that homeowners won't easily be able to find. They'll also have a good idea as to which lenders are more willing to take a risk on you.

The bottom line

Anthony says not to panic and speak to your broker or lender about what options you have.

The road ahead might be a bit bumpy but there are signs that things will get easier by this time next year:

🌈 The RBA has reduced the rate hikes from .50% monthly to .25% in October.

🫱🏿‍🫲🏻 If you have a solid deposit and your debt-to-income ratio is healthy then buying in a falling market could be a good thing.

🧮 Unlike us Expert Analysis nerds, you're probably not hanging on for the Australian Bureau of Statistics' monthly Consumer Price Indication (CPI) but it will give us an indication of where the cost-of-living is heading. We'll read the next issue on October 26th so you don't have to.

Financial Disclaimer:

The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. 

*We've calculated this on a mortgage balance of $600,000 on a 25 year loan term with Principal and Interest repayments, with a starting rate of 1.79% (increased to 4.29%) over the May, June, July, August, September, and October RBA announcement period).