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Mortgage Prisoners: Most Aussie homeowners want to refinance but can’t

Mortgage Prisoners

A whopping 83% of mortgage holders would like to change lenders, but can’t and are therefore “mortgage prisoners” according to a new report by Mozo.

Here’s the problem: while 38% of people intend to make the switch, 45% are unable to due to limited earnings and therefore paying a premium to own their property.

Quick facts from the report:

  • 29% of mortgage holders who opted for repayment holiday recently lost their job and 16% experienced a pay cut.
  • 40% of those on a mortgage holiday were confident they could resume principal and interest repayments while 29% felt they could make interest only.
  • A further 27% felt it would be ‘touch and go’ to make either principal and interest or just interest-only payments, while 3% stated they could not afford to make repayments.
  • 62% of mortgage holders have concerns about selling their home or foreclosure
  • 83% of mortgage holders would like to change lenders.
  • 38% of people intend to make the switch, 45% are unable to due to limited earnings.
  • One in ten mortgage holders admitted they didn’t shop around when obtaining a loan.
  • By switching from the average to best rate on the market borrowers can save $2631 per year on average.

Captives of cost

The Mortgage Prisoner Report from Mozo found that many Australians are paying a premium to own their property and for a growing number that high cost has become a bridge too far.

In fact, research from the Australian Prudential Regulation Authority in August shows there is $229 billion worth of loans in Australia on temporary repayment deferrals, accounting for around 8.5% of total outstanding loans.

In a year when the economy has been upended, the reasons are simple.

Mozo surveyed 3,270 property owners for its latest study and found that 29% of mortgage holders who opted for repayment holiday had recently lost their job and 16% experienced a pay cut.

While there’s a portion of mortgagees who remain unaffected by the economic downturn to this point, it seems the majority of people want to make a home loan switch and refinance.

Mozo has found that a whopping 83% of mortgage holders would like to change lenders.

Here’s the problem: while 38% of people intend to make the switch, 45% are unable to due to limited earnings.

On the precipice: 27% say paying off their home loan is touch and go

According to the Australian Prudential Regulation Authority (APRA), around 8.5% of all loans in Australia – approximately $229 billion worth – have been put on hold.

But the uneven impacts of the economic crisis mean some mortgage holders are better placed to resume repayments than others.

A recent survey conducted by Mozo found that among those who have paused their mortgage repayments, 29% had lost their job and 16% had experienced a decrease in pay.

A majority, however, had remained unaffected by the downturn.

When asked about restarting their mortgage, 40% of respondents said they were confident they could make principal and interest repayments, while 29% felt they could just afford to make interest only repayments.

Meanwhile, 27% believed paying off their loan would be ‘touch and go’, and 3% said they would not be able to service their loan at all.

For perspective, a 3% default rate across paused mortgages would equate to nearly $7 billion in loans.

mortgage prisoners repaying

These worries have come front and centre as banks contact mortgage deferers to discuss restarting repayments.

Depending on their financial situation, borrowers will have to either resume P&I repayments, restructure their loan, extend their mortgage holiday for an additional four months, or sell their property.

Trapped: Defining the mortgage prisoner

So who are Australia’s mortgage prisoners?

These are homeowners who are stuck with their current home loan and unable to refinance to a lower rate and make use of the savings that could provide.

This is not down to a lack of desire. In a recent Mozo survey a considerable 83% of mortgage holders said that they would like to change lenders, however, as in many parts of life, COVID-19 has had a devastating impact on the incomes of many Australians.

Here’s how: 29% of survey respondents reported having recently lost a job, while 16% said that they had experienced a pay cut.

As a result, 45% of all of the mortgage holders surveyed are currently unable to switch home loans because of limited earnings.

And therein lies the problem, and the first reason that some homeowners find themselves in ‘mortgage prison’ – a significant drop in income.

mortgage-prisoner locked in

Refinancing is simply taking out a new loan.

But lenders need to adhere to responsible lending standards too, so during the process of vetting a new loan application they need to make sure that borrowers can prove that a) they have the income to meet their repayments and b) they’ve got a history of meeting those repayments.

Without being able to meet those requirements, mortgage holders will find it very difficult to refinance.

Another issue which could be born out of the pandemic is a fall in property values, with 66% of mortgage holders admitting that they are worried about a housing equity plummet in the next year.

mortgage-prisoner locked in

Why homeowners fear market plunges

Given the slower real estate market of 2020, Aussie mortgage holders are also worried (66%) about a housing equity plummet in the next year, which could propel a potential mortgage prisoners crisis.

Equity is the difference between the current value of your property and the amount you owe on it (if you have a loan), so negative equity occurs when the amount you owe is greater than your house’s value.

Falling equity can be an issue for borrowers looking to refinance, particularly if their loan-to-value ratio (LVR) becomes higher. In most cases as LVRs increase, so do the rates on offer. In a situation where the LVR goes above 80%, borrowers may be forced to take out lenders mortgage insurance – an additional expense which can cost thousands of dollars.

Among the mortgage holders surveyed by Mozo, 73% believed property prices would plummet (though 39% of that group anticipated a bounce back).

Conversely, 21% felt housing prices would remain stable, while a meagre 5% predicted a property price upswing.

Mozo Director Kirsty Lamont says a price plummet could tip some property owners into mortgage prisoner territory, or deepen their inability to switch.

“For mortgage holders seriously concerned about making repayments, it’s only natural that they’d be nervously eyeing the housing market and hoping things don’t slide. The double whammy of foreclosure and plummeting home value is a real concern for many,” said Kirsty Lamont, Mozo Director.

mortgage-prisoner australia

As the figures above show, around two-thirds of mortgage holders in most states reported being concerned about the possibility of falling property prices and the flow on effect that could have on home equity.

That’s particularly true for homeowners in New South Wales (71%) and South Australia (70%), though slightly less so for residents in Western Australia (54%).

Refinance strategy: Tips for property owners

Mozzo recommends that if refinancing seems like a tall order, the first thing you should do is research what’s on offer elsewhere, along with what your lender is offering new customers, and try to negotiate your current rate down.

If your lender won’t budge, consider ways you can become more appealing to another one.

One thing to keep in mind is that when lenders assess refinance applications, they pay close attention to a borrower’s recent repayment history.

So if your mortgage has been on pause for several months, lenders won’t have much to go by when determining your ability to service a loan.

To get around this problem, would-be refinancers will have to get a few months’ worth of repayments under their belt with their current lender before shopping around.

For some, especially those whose financial situations have stabilised since March, this won’t be such a large hurdle.

Beyond this, it’s also a good idea to lower your day to day expenses and focus on tackling any other debt you might have.

And when it comes time to find another lender, avoid making inquiries with too many as this might affect your credit score. Instead, do your research upfront and narrow down your options to a select few.

A final note from Mozzo’s report is that most homeowners don’t shop around on home loans.

As such, they might not even realise the savings that can be had by doing the right research.

For this report, Mozo found that:

  • One in ten mortgage holders didn’t shop around when obtaining a loan.
  • By switching from the average to best rate on the market borrowers can save $2631 per year on average.

So, if you can get yourself into a stable financial position, there are excellent long term savings to be had by switching your home loan.

In summary, here are some questions to ask yourself:

  • How does my current rate compare to the rest of the market?
  • What’s being offered to new customers by other lenders?
  • Does my recent repayment history look reasonable to a lender?
  • Can I also lower my current day to day expenses?
  • And, can I lower my overall debt?
  • Have I pinpointed just a select few lenders to approach about refinancing?

Now is the time to take action and set yourself for the opportunities that will present themselves as the market moves on

mortgage prisoners

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The post “Mortgage Prisoners: Most Aussie homeowners want to refinance but can’t” by Rita Thomas appeared first on the Blog


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2020 saw 6,777 interest rate cuts across Australia’s home loan institutions

From 1 January to 31 December there were 6,777 cuts to home loans, with an average cut of -0.30%, according to Canstar’s database.

It recorded:

  • 880 cuts to variable rates for owner occupiers, with an average cut of -0.21%
  • 2,455 cuts to fixed rates for owner occupiers, with an average cut of -0.33%
  • 764 cuts to variable rates for investors, with an average cut of -0.21%
  • 2,678 cuts to fixed rates for investors, with an average cut of -0.32%

Over the same period there were 535 home loan rate increases, with an average increase of 0.20%.

On 1st January 2020 the average variable rate for owner occupiers paying principal and interest was 3.73% (80% LVR). Today that rate is 3.32% The lowest variable rate was 2.69% and it is now 1.99% (80% LVR) or 1.77% (60% LVR).

On the 1st January 2020 the average 3-year fixed rate for owner occupiers paying principal and interest was 3.15%. Today the average 3-year fixed rate is 2.30%. The lowest 3-year fixed rate was 2.69% and it is now 1.89%.

Australia's home loan institutions

Savings interest rates

From 1 January to 31 December Canstar recorded:

  • 529 cuts to savings, with an average cut of -0.18%
  • 262 cuts to regular savings accounts, with an average cut of -0.19%
  • 267 cuts to bonus savings accounts, with an average cut of -0.17%

On 1st January 2020 the average regular savings account rate was 1.12%. Today that rate is 0.43%. The maximum rate was 2.65% and it is now 1.75% (available for 4-months).

On 1st January 2020 the average bonus savings account rate was 1.47%, now just 0.75%. The maximum rate was 2.25% and it is now 1.35%.


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Home-buyer confidence at an all-time high


More than two-thirds of respondents in a recent survey believe that the conditions are right to purchase a home – a level of confidence not seen since the onset of the pandemic.

Finder’s latest consumer sentiment survey, which involved a nationally representative sample of more than 20,300 respondents, found that 67% of Australians feel that now is a suitable time get on the property ladder, up from 42% last April.

This marked the first time that home-buying optimism has reached this level since the financial comparison site started tracking the metric in May 2019.

Confidence was highest in Adelaide, where 77% of those polled thought now is the right time to buy a home. This was followed by Melbourne’s 70%, Brisbane’s 69%, Perth’s 67%, and Sydney’s 59%. Numbers were not available for Canberra, Darwin, and Hobart.

Those expecting house prices in their areas to “significantly increase” also hit an all-time high of 19%, climbing from just 5% in September last year.

Meanwhile, respondents who anticipate property values to “somewhat increase” rose to 44% from a low of 18% back in April.

Graham Cooke, insights manager at Finder, said that the recent spike home-buyer optimism was a good indication of economic recovery.

“This rebound in buyer confidence is indicative of increased economic activity over the past few months, along with an optimistic outlook for 2021,” he said. “Not only did the Australian government do a better job than most at restricting the spread of COVID-19, but federal and state economic support measures helped prop up the property market.”

Cooke said that property prices in every capital city, expect for Melbourne, have reached a higher level compared to the same time last year, adding that he expected “this trajectory to continue,” especially with 86% of economists in a separate Finders survey predicting a full recovery of national house values this year.

However, Cooke advised prospective buyers to carefully consider the pros and cons “before taking the plunge in the current market.”

“Low interest rates and government assistance packages like the First Home Loan Deposit Scheme put buyers in a strong position. The potential removal of stamp duty in NSW will be another boon for buyers and may spread to other states,” he said. “If you’re thinking about dipping your toe in the market this year, make sure you have a strong credit history, and shop around before signing up for a home loan.”


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50,000 investors in mortgage stress put their tenants in precarious position

investors in mortgage stress

There are 50,000 households that face high housing cost burdens themselves, following the pandemic, who also own a private investment property.

There are 956,000 households living in housing affordability stress (HAS) in Australia, according to a new AHURI report that looked into the impact of COVID-19, with Commonwealth rent assistance (CRA) reducing the number to 758,000.

The situation of the 50,000 was “cause for concern given that private renters have been disproportionately affected by the downturn,” the report noted after modelling from the University of Adelaide and Curtin University.

There is considerable potential for highly leveraged households owning an investment property, who are spending a higher proportion of their incomes on their own housing costs, to run into trouble meeting those costs and/or the servicing of their investment loan commitments, it noted.

“We estimate that there are around 37,500 mortgage home owners living in HAS who also own an investment property, and approximately 12,000 private renters in a similar position.”

It is estimated that the overall number of households living with HAS would have risen to 1,336,000 (from the 758,000 baseline) without the JobKeeper and JobSeeker interventions.

Investors in Mortgage Stress

The study found that the number of households living in a precarious situation is very high, and will likely remain high even after a partial recovery in 2021 and the withdrawal of much of the Australian Government’s income support measures.

Without an extension of the JobKeeper income support measures beyond March 2021, the number of households living in HAS is likely to increase significantly, the AHURI report concluded.

Households living with HAS and owning an investment property themselves are predicted to more than double.

The report noted JobKeeper and JobSeeker interventions reduced the incidence of housing affordability stress by a considerable amount: 861,000 households compared to 1.34 million without the intervention.

“As JobKeeper moves through its later phases, the predicted number of households in HAS is expected to gradually rise by a further 124,000; 73 percent of these households are private renters.”

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