September 14, 2023 by Dymphna

Mortgage prisoners still out there

Stuck with your current lender? You’re not alone.

So one of the many novel things that Covid gave the English language was the concept of “Mortgage Prisoners”.

There was an idea here that some people got mortgages at the super cheap rates available during Covid.

And they were assessed at a serviceability buffer of 300 basis points.

And the idea there is that sometimes rates might go up by 300 basis points over two or three years. So you want to be covered.

But then rates went up. Fast. They rocketed up 400 basis points in a little over a year.

We’d never seen anything like it.

But what it meant is that we blew through people’s serviceability buffers.

And that’s not a huge drama. If you could afford 300, then you’re probably ok around 400.

But what it does mean is that you’re stuck. Because if you want to change lenders, lenders are looking at current rates (which were the limits of your serviceability 12 months ago), and then adding another 300bps on it, and saying, nup, you can’t manage it.

Unless you’ve had a big change in your circumstances in the past 12-months, the new serviceability thresholds are well out of your reach now.

And all that means that you’re stuck with your current lender… no matter how uncompetitive their rates are.

You’re a mortgage prisoner.

And mortgage brokers are reporting that they have a growing number of mortgage prisoners on their books:

A survey of members conducted by the Mortgage & Finance Association found 80 per cent of brokers had an increase in customers unable to refinance from an existing loan because they cannot meet serviceability requirements at a new bank. Banks are required to test if borrowers can repay their loans at interest rates 3 percentage points higher than the market rate.

… The survey of 466 members also found 93 per cent of mortgage brokers say homeowners are more concerned about meeting mortgage repayments than they were six months ago. “Australian homeowners are concerned about meeting repayments in the wake of persistent rate rises intended to curb inflation,” Ms Pannek said.

… the RBA said in April that 16 per cent of mortgage borrowers are in the mortgage prison…

That 16% figure is substantial. That’s like one in six borrowers in mortgage prison.

And is it a problem?

I don’t anticipate it being a big deal. The mortgage market is still pretty competitive. I’m not hearing any stories of people being stuck with lenders charging even 100bps more than current market rates.

And it’s a tough situation if you’re in mortgage prison. And if you’re really struggling, then switching to a cheaper lender might help at the margin.

But if you’re really underwater, saving 50bps on your mortgage probably isn’t going to save you.

So I’m not sure it’s going to have a big impact on the market either way.

It’s an interesting story, but once the steep pace of hikes is in the rear-view mirror, the idea of mortgage prisoners should fade away in a year or two.