02 Apr 2023 By theguardian
A growing number of Australian have become "mortgage prisoners" - trapped by crippling mortgages they are unable to renegotiate.
This growing cohort of pandemic-era homebuyers are unable to refinance because they no longer meet lenders' standards after recent rate increases.
"There is without a doubt a big challenge for new mortgage holders over the past three years," the executive director and head of research at K2 Asset Management, George Boubouras, said.
"Many are mortgage prisoners and a mortgage prisoner is unable to refinance because of the serviceability buffers."
A serviceability buffer, used to help determine borrowing capacity, is the rate a lender assesses a customer's ability to meet repayments.
Home loans written between 2019 and 2021, when rates were at historic lows, were tested on an applicant's ability to make repayments at 2.5 percentage points above the lending rate. That buffer was then increased to 3 percentage points.
But mortgage rates have shot up by about 3.5 percentage points since May last year, in line with the rate-hiking cycle of the Reserve Bank.
Against a backdrop of falling house prices, many pandemic borrowers would not meet today's lending standards, which prevents them from getting a better deal from a rival lender.
Research from financial comparisons site Canstar shows that almost one-quarter of owner-occupiers making principal and interest repayments are on rates in excess of 6.5%. This compares to mortgage rates in the market as low as 4.7%.
"For borrowers still in sound enough financial shape to refinance, an interest rate above 6.5% should be blaring alarm bells and sending them off to a bank for a better deal," said Canstar group executive, Steve Mickenbecker.
A homeowner with a $500,000 mortgage would pay an additional $570 a month on a rate of 6.5% compared to the lowest rates in the market.
Canstar found that some borrowers are paying more than 8% for high-rate loans taken out many years ago, representing $1150 in additional repayments a month for a $500,000 loan.
Rating agency Fitch found last week that there was an increase in mortgage holders falling more than 30 days behind in repayments, which it said may "indicate that borrowers are beginning to face stress due to inflation and rising interest rates".
The predicament facing mortgage prisoners has sparked calls for the serviceability buffer, which is overseen by the banking regulator, to be reviewed to allow customers on uncompetitive rates to switch lenders.
Part of the complexity, however, lies in any potential loosening of lending standards at the same time as the Reserve Bank tries to discourage spending to combat high inflation.
Boubouras said a balance needed to be struck, and that changing the serviceability buffer to help mortgage prisoners refinance would be beneficial to the overall economy.
In the meantime, households under pressure are digging into their savings to meet mortgage repayments, an unsustainable long-term practice.
Others are asking their lenders to switch to interest-only loans.
Reserve Bank modelling shows that at current interest rates, about 15% of mortgaged households with variable rates would experience "negative cashflow", which refers to spending outstripping income.
Principal of Digital Finance Analytics, Martin North, said if the situation persists, a significant number of indebted households will be grappling to make repayments by next year.
"My view is that we will start to see some of the pressures resulting in higher stress, translating into refinancing, extended loans and ultimately, probably higher delinquencies," said North.