Hi Lisa, great question!

This is unfortunately a common experience right now. A homeowner in this situation is often referred to as a ‘mortgage prisoner’ – a bit grim if you ask me!

So, what’s going on here? 

Lenders determine “serviceability” (aka your ability to pay off a loan) based on the size of your loan and your assessment rate (the interest rate they will charge you plus a buffer to cater for future rate rises) vs your income, expenses and other liabilities.

Just a few things that could influence these factors...

• Rising interest rates
• Increase in expenses (i.e. the rising cost of living = higher bills)
• Reduction in income (i.e. parental leave, change to part-time work or job loss)
• Increase in liabilities (i.e. a new credit card, increased credit card limits or purchase of a new car)

If a lender assesses you as no longer able to comfortably “service” your mortgage, it’ll be difficult to refinance to get a better rate – enter the ‘mortgage prisoner’ phenomenon.

So, let’s start thinking about what an escape plan might look like.

Here’s what I suggest:

1. Get a second opinion. You never know how a new lender might assess you based on their lending criteria.

 

2. Negotiate a better rate with your existing lender. If refinancing isn’t an option, it’s important to make sure you’re on the best rate with your current lender.

 

3. Consider restructuring your loan to lower your repayments or pay off more of your principal.

 

4. If you have any savings, maximise your offset account or redraw facility (or investigate whether these features are right for you).

 

5. Create a budget, reduce your credit card limits (or ditch them altogether) and put any extra funds towards your home loan if you can.

 

6. If your income increases (e.g. you get a new job, promotion, or you return to full time work after having a child), re-visit your options with your broker.

 

7. If (when 🤞) rates eventually come back down, ask your lender to recalculate your repayments.

Great work being on the front foot and taking an active approach to managing your home loan. You’re already one step ahead in our books!

All the best, Lisa.

Teddy Butler-August
Finspo Home Loan Expert