Good news! ‘Mortgage Prison’ breaks on the rise

If you’re stuck in a “mortgage prison” and can’t refinance to a lower interest rate or if you’ve had to give up your homeownership dreams because of tough “serviceability” requirements, there’s hope on the horizon.

Some of the banks have now rolled out reduced serviceability buffers (also known as interest rate buffers), paving the way for homebuyers to re-enter the market and for mortgage prisoners to break free.

What is a serviceability buffer?

When you ask a bank for a loan, they check if you can easily pay it back. They do this by adding a bit extra to the interest rate you’d pay. This extra bit is like a “stress test” to see if you could still manage the loan if interest rates went up a lot. Nobody wants a loan that’s too hard to pay, right? For more information see our article on serviceability buffers.

Background

Back in October 2021, The Australian Prudential Regulation Authority (APRA) which regulates lending standards in Australia, raised the minimum serviceability buffer from 2.5% to 3%. This meant that if rates climbed 3% above the original rate borrowed, the debt could still be serviced. It’s important to note that this increase was made at time when interest rates were very low, house prices were rapidly rising, inflation was increasing, and household debt was on the up.

Now, let’s talk about what’s happening in 2023. Some people who got loans with low interest rates are finding it really hard to get new loans because of a rule that says they must be able to handle a 3% increase in their loan payments. This problem is getting worse because the cost of living is going up, and these folks are feeling stuck with their high-rate loans. We call them “mortgage prisoners.”

Light at the end of the tunnel for mortgage prisoners

Good news! A number of lenders have realised the tough situation mortgage prisoners are in. Plus, with interest rates now at or near their peak, they’re now making it easier to get approved for loans. They’re doing this by allowing some people to use a lower buffer (as low as 1.75% on a case-by-case basis) instead of the strict 3%.

But here’s the catch: Not everyone will qualify, and lenders will still check your money situation carefully. If you’re a responsible borrower who can make payments on time and are financially stable, you could be in with a chance.

Do I qualify?

Here’s a list of things lenders might want before they apply the lower buffer: Remember this will vary between lenders – some are more flexible than others:

• You’ve been paying your debts on time for the past year.
• Your income hasn’t gone down.
• Your debts haven’t gone up.
• Your loan-to-value ratio is less than 80%.
• The new loan isn’t more than your existing debt.
• You’re making principal and interest payments.
• You’ve had your loan for at least a year.
• There are no signs of mortgage stress.

In short, Australian banks have changed how they check if you can afford a loan. It’s easier for some people now, but you still need to meet these requirements. You should talk to your mortgage broker. They can help you find the right lender and get you out of a tough mortgage situation or into your new home sooner than you think.

Important factors to consider when checking if you can afford a loan:

Income is the money you receive regularly, usually from sources like your job, rental properties, investments, or any other sources of earnings. It’s the cash flow that comes into your pocket, bank account, or financial assets. Lenders look at your income to make sure you have enough money to pay back the loan they might give you.

Expenses are the costs you have to pay regularly, like utility bills, groceries, insurances and transportation expenses. Lenders review your expenses to understand how much money you have left after covering these costs, which helps them determine if you can afford to repay a loan.

Existing debts are the loans or money you owe right now. Lenders look at things like how much you owe on your mortgage, credit cards, car loans, or HECS/HELP debts. If you already owe a lot, it can make it harder to get more loans because it affects your ability to pay them back.

Loan term refers to the amount of time you have to repay a loan. When the loan term is longer, it means you have more time to pay it back, which can make your monthly payments smaller. This can make loans seem more affordable to borrowers because they have a longer time to spread out their payments.  Remember though that a longer term means a higher total interest bill.

Credit history is a crucial part of getting a loan. It shows lenders how reliable you’ve been with borrowing and repaying money in the past. Your credit history and score give them an idea of how trustworthy you are when it comes to repaying loans.

Other financial commitments are extra money responsibilities you have, like child support or alimony payments. Lenders will look at these when they check if you can afford a loan.

Debt-to-income ratio is a way for lenders to see how much of your income goes towards paying off debts. It helps them figure out if you can handle more debt, like a home loan.  Most lenders are comfortable with a DTI of up to 6.

If you would like to know more about reduced serviceability buffers and are keen to find out if you qualify, contact us today.