Banks have been slowly turning the screw on borrowing power and living expenses over the past year and many would-be refinancers are finding their properties are coming in below value.
Are there still ways to escape a high interest rate mortage?
The 3 types of mortgage prisoners in 2018
As reported in the Herald Sun (25 August), nearly half of all homeowners are now mortgage prisoners.
That’s according to a survey by boutique research firm Digital Finance Analytics, which found that 31,000 refinance applications were rejected in July compared to around 2,300 in August last year.
Much of this has to do with the regulatory clampdown by the Australian Prudential Regulation Authority (APRA) spurred on by the Royal Commission into the banking and financial services sector.
Chances are that if you got approved for your home loan just 6 months ago, you’re likely to declined from the same bank today. Here’s why.
The first type of home loan prisoner is someone who initially borrowed at a high Loan to Value Ratio (LVR), say, 90-95% of the property value.
However, when you try to refinance your home loan 2-3 years later, your property comes in under value.
Let’s say you borrowed $475,000 on a $500,000 at an interest rate of 3.59% per annum.
You make some extra repayments here and there, reduce your loan balance to around $430,000 but find that your property is now worth $450,000 (95% LVR).
You’re no longer eligible to refinance, with most lenders only considering your application if you have 80-90% owing.
Even if you reduced your loan balance to 90% LVR, you may be charged over $8,000 in Lenders Mortgage Insurance (LMI). This cost may not make the refinance worth it.
In an even worse position are borrowers who bought a new home within the past year or two because it’s likely that they purchased at the peak of the market.
Selling the property is no longer an option because the mortgage balance is higher than the property value.
Some lenders will allow your parents to provide a limited guarantee on your mortgage, reducing your LVR and allowing you to refinance to another lender.
This isn’t for everyone and many lenders won’t allow this unless we can ensure that you are not putting your mum and dad at risk.
In the current market environment, you’re likely better off making extra home loan repayments and waiting for your local property market to bounce back.
At the same time, cut unnecessary spending and budget months before you apply to refinance.
All of this will work in your favour when making your case as a borrower.
Better yet, call us on 1300 889 743 or fill in our free assessment form and we can let you know if you’re in a position to switch lenders and how to maximise your borrowng power.
Borrowing power prisoners
Investors can also be mortgage prisoners, particularly those that have bought multiple properties in the past 5 years.
The biggest painpoint has certainly been the increase to investment rates, particularly for interest only loans.
Whether you’re an investor or not, you’re borrowing power is being squeezed from both ends due to higher interest rates, rate buffers and more onerous benchmarks for living expenses:
- No longer solely reliant on the Household Expenditure Method (HEM), some lenders now require you to calculate your spending on a weekly, fortnightly, monthly, quarterly and yearly basis across 37 different expenses categories.
- Higher living expense figures are then applied to certain affluent postcodes and to borrowers with high household incomes.
- Lenders are limiting how much rental income they will consider when assessing your income.
- It’s more difficult to get approved if you can’t prove your income as a self-employed borrower and low doc loans usually come with much higher interest rates.
- Higher interest rate buffers now apply, which have risen from about 1.5% above your actual rate to around 4-5.00% in the past 5 years.
- Buffer rates also apply to existing debts that you have which has particularly affected investors that own a number of properties, even if you’re comfortably making your repayments!
Added to this the recent rate hike by most major banks and it’s becoming very expensive to switch banks.
- Some specialist lenders have less conservative borrowing power calculators and still offer competitive interest rates.
- You may want to consider switching from interest only to principal and interest (P&I) payments so you can qualify with more lenders at a much lower interest and at much a lower assessment rate. This is opposed to being assessed over the full loan term minus the interest only period.
- If you own multiple properties, consider selling one or more properties. After seeking professional financial advice, you may want to then consider investing in assets other than real estate.
- Look at your living expenses, debts and liabilities and consider reducing them or cutting them from your spending completely.
- Debt consolidation is a viable option to increase your borrowing power, especially if you have a car loan, and multiple personal loans and credit cards.
- Look for high rent yield investment properties such as a house with a granny flat or multiple units on one title.
Lending criteria prisoners
Lending policies have became progressively stricter since 2010.
For example, in 2016, most lending to foreign investors was completely cut by the banks, leaving many good borrowers unable to refinance.
Specialist lenders have moved in to provide solutions but at much higher rates.
As mentioned above, there are many homeowners who were approved for a low doc loan prior to 2009 when it was much simpler to get approved.
Many of these borrowers are still stuck a decade later as low doc loans now require additional documents to verify your income.
More and more lenders are moving in to help people that are being let down by the banks.
As competition increases, rates will eventually reduce and your borrowing power will increase so it’s only a matter of time.
If you’re a mortgage prisoner, the best thing that you can do today is to speak to an experienced mortgage broker about the home loan options that may be available to you.
At the very least, they can help you build a plan for what you need to do to qualify in 6-12 months time.
To speak with one of our mortgage brokers, please call 1300 889 743 or fill in our online enquiry form today.