Last Updated: 21st September, 2022

Who are mortgage prisoners?

A mortgage prisoner refers to anyone with a mortgage who is unable to refinance their home loan.

Essentially, they’re stuck with the terms and conditions of their home loan.

Typically, mortgage prisoners in Australia are people who can’t refinance because they:

  • Do not meet the new serviceability criteria
  • Do not have enough equity.
  • Have bad credit.
  • Have lower valuations, so their property comes under value when trying to refinance.

They are not bad borrowers per se, they just do not fulfil the stringent criteria to refinance their home loan.

Mortgage prisoners are stuck paying a higher interest rate on their home loans and are locked out of cheaper interest rates due to their low income and high expenditure.

In particular, homeowners in Perth are bearing the brunt of being mortgage prisoners as its property market has been underperforming for many years.

Fortunately, there’s been an uptick in property values in the Perth market.

What are the types of mortgage prisoners?

There are mainly three main types of mortgage prisoners:

  • Valuation prisoners: These are people whose property comes under value during refinancing. They end up with a high loan to value ratio (of over 80%) and need to pay Lenders Mortgage Insurance.

  • Borrowing power prisoners: These prisoners are investors who bought property in the past 5 years and are held captive due to an increase in investment rates.

  • Lending criteria prisoners: These are homebuyers who had borrowed when the lending criteria was relaxed, especially in the case of low doc loans. Lenders now require additional documents to verify income.

What causes people to be mortgage prisoners?

After the crackdown by the Royal Commission, banks and lenders have adopted tougher lending criteria and looking carefully into a borrowers’ income and expenses to ensure that they can repay the home loan without financial strain.

Borrowers who had taken out a home loan when the lending was lax are suffering now, and are experiencing mortgage stress.

According to comparison website Mozo, there are over 1 million Australians who are experiencing mortgage stress.

Out of the 1 million, 40% of those seeking to refinance now are facing difficulty, and are held captive as mortgage prisoners on their home loans.

The problem is perpetuated by low-income growth and higher costs of living in Australia.

There is a growing number of mortgage prisoners in Australia because their:

  • Interest-only home loans are switched to variable interest rate home loan rates.
  • Banks and lenders had approved their home loans before the stricter lending criteria was adopted, especially for borrowers of low doc loans and expat home loans.
  • Many banks and lenders have pulled out SMSF loans, and borrowers are not able to refinance.

What options are available for mortgage prisoners?

It’s not the end of the road for mortgage prisoners. Here are some solutions you can follow:

  • Lower your household costs and cut down on unnecessary expenses to improve your borrowing power. Try to create a budget and stick to it.
  • Reduce your credit card limits.
  • Pay off your home loan sooner so you can get out of being a mortgage prisoner on your current contract.
  • Downsize to a smaller property to help free up your finances.
  • If possible, ask for a pay raise or bonus to improve your situation.

Golden tips from our brokers

Our expert mortgage brokers can work with your current situation and identify solutions to get you out of being a mortgage prisoner.

  • If you have less than 80% owing on your current home loan, then it’s best to go with a guarantor home loan. You save thousands by not paying Lenders Mortgage Insurance.
  • If your borrowing power is too low, we have lenders on our panel who can help you with your situation.
  • If the stricter lending policy has hit you, talk to us. We can find a solution to suit your needs and showcase you as an attractive borrower to lenders.
  • For SMSF borrowers, we know some non-bank lenders who have launched low-price SMSF loans that you can refinance.

If you’re locked in as a mortgage prisoner, talk to our expert brokers.

We can find you tailor-made solutions so you can refinance to a competitive interest rate home loan.

To get in contact with our brokers, call us at 1300 889 743 or fill in our free assessment form today.