More Australians landing in “mortgage prison”

Up to one in five Australian mortgage holders could find themselves unable to refinance thanks to climbing interest rates and stringent mortgage stress testing, economists say.

Such borrowers, said to be in “mortgage prison”, cannot refinance to a cheaper loan because they don’t meet the bank’s lending requirements, according to The Sydney Morning Herald. While negative equity can play a role, mortgage borrowers are now more often tripped up by stringent stress-testing requirements.

In October, Jarden chief economist Carlos Cacho predicted that 10% to 15% of Australian mortgage borrowers would find themselves in mortgage prison. This week, he said the issue had gotten worse.

“Now that would likely be closer to 15 to 20%,” he told the Herald.

Cacho said that borrowers who bought during the recent housing boom were at greater risk due to projected property price falls of 15% to 20% peak to trough. He estimated that up to 30% of those who bought in the last two years could find themselves in mortgage prison.

Since it began hiking rates in May, the Reserve Bank has lifted the cash rate at the fastest pace in three decades. The rate has been lifted nine consecutive times, and RBA governor Philip Lowe has warned that more hikes are on the way.

Stress testing

Banks are currently offering mortgage rates of around 5%, and new customers must prove they could still make repayments if their rate rose to 8% – the 3% buffer required by the Australian Prudential Regulation Authority.

Anthony Landahl, managing director of Equilibria Finance, conceded that the stress test was necessary, but said it was unfairly limiting to those who needed to refinance.

Mariman Amalsadiwala, director of Red Maple Finance, said that many people who qualified for a mortgage only a couple of years ago wouldn’t qualify today.

“Imagine if you were tested at 55 a year ago,” he told the Herald. “That took away borrowing capacity for everyone. At that 8% level, you don’t even have the income to service our existing mortgage.”

Amalsadiwala said that rising rates had put some of his clients who had bought houses and land packages in a bind.

“I have clients who have booked land two years ago and now they don’t have the borrowing capacity to even buy the land, let alone build on it,” he said.

Unfairly limiting

Anthony Landahl, managing director of Equilibria Finance, conceded that the stress test was necessary, but said it was unfairly limiting to those who needed to refinance.

“Of course there has to be an affordability stress test, but there also needs to be a conversation around letting people refinance when it puts them in a better position,” he told the Herald. “The reason it’s a problem is because an individual may be trapped on a rate or a product which is not the best they could be on. They could have a perfect payment history and credit history and they have never missed a payment, but those individuals are being assessed the same way a first-home buyer who has never purchased a property before is being assessed.”

Cacho said the problem wasn’t limited to borrowers who took out the maximum loan available to them.

“The only thing that’s changed in a meaningful way is the change in borrowing capacity,” he told the Herald. “Even relatively conservative borrowers are going to have problems.”

From MPA