Time to read : 4 Minutes
As the twin pain of interest rate rises and the cost of living crisis continue to bite hard, mortgage holders have been told time and again to refinance their loan to a cheaper rate and cut their monthly repayments.
But what about those homeowners who’ve been knocked back for a lower rate? Is there anything they can do? And just how many people are caught in “mortgage prison”?
I took a dive into Compare Club’s home loans data. What I found was quite shocking.
In less than six months, the number of homeowners experiencing serviceability issues has doubled from 15% to 30%.
The number of refinancing enquiries from Australian mortgage holders with a loan-to-value (LVR) ratio of 90% or more, which makes refinancing hard or impossible, is now at its highest level since interest rates began to rise, as the graph below shows.
Yes, but: that doesn’t mean mortgage holders should abandon hope.
What does this mean for homeowners looking to refinance?
In a nutshell, banks and other lenders are far less likely to offer competitive interest rates to people with an LVR of 80% or above, and will often insist the homeowner also pay thousands more dollars to cover the cost of Lenders Mortgage Insurance (LMI).
This has the effect of locking people into a “mortgage prison” as they will be unable to access lower interest rates, stretching their household budget to breaking point.
Why is LVR important for refinancing?
The loan to value ratio shows how much of your property you actually own, so the more of the property you pay off the less of a risk you are for a lender.
On the flipside people who have made very little inroad into their home loan repayments and have a high LVR are considered risky borrowers.
Your LVR should come down as you pay off your home loan, but because the value of property can change depending on the property market your LVR can go up and down as a result.
Be aware: if you have a very high LVR and the value of your property goes down, there is a risk you can end up in negative equity which means you owe more on the mortgage than the actual value of your entire property.
Which homeowners are struggling most with their mortgages?
Our data suggests homeowners are being squeezed by a number of different pressure points on their mortgage. Some of these points include:
Property prices have dropped in some suburbs as interest rates started to rise, which can increase the LVR.
Homeowners switching to interest only loans. By not reducing the amount borrowed, it leaves these homeowners vulnerable to an increase in LVR if their property drops in value even slightly.
First time buyers who borrowed at the absolute limits of what they could afford when the cash rate was just 0.1%, which allowed them to take out a larger loan than they’d qualify for today. These homeowners won’t have reduced their loan by much and are also vulnerable if property prices drop.
Reduced borrowing capacity due to lenders now including items such as Buy Now Pay Later and student debt when assessing loan applications.
What can you do if you are concerned about your LVR and refinancing?
The first step should always be to ask your current lender if you can get a better rate - they don't want your mortgage to go into arrears any more than you do.
Don't take your bank's word for it when they say you can't refinance - different lenders value properties differently.
Engage a broker: they'll have access to rates you may not be able to get.
Research property trends in your suburb. If home values rise, you may be able to wait it out before your LVR returns to under 80% (assuming you can afford to).
Don't panic! If you can't refinance, there are likely to be other big expenses you can cut the cost of, like energy bills and life insurance
Contact your lender if you're really struggling to pay your mortgage
The bottom line
There’s no way to sugar coat this: some mortgage holders are in for an uncomfortable few months.
But don’t lose hope:
Lenders really hate repossessing property. So if you’re in genuine hardship, they’ll try and find a way to give you some breathing space.
You’re not alone: brokers know the market better than you or I.
Noises from banks and economists suggest we’re coming to the end of interest rate rises. There may be light at the end of the tunnel.
