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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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Affordability Slows First Home Buyers

Home Buyers

The home loan market came off the boil in June with new loan commitments falling 1.6 per cent overall from record highs to $32.05 billion.

This was the first significant fall since May, 2020.

It was led by a 17.5 per cent decline in financing for the construction of new dwellings, which is now down almost 40 per cent since February.

Owner-occupier loans fell by 2.5 per cent from record highs, led by a continued unwind in the HomeBuilder-driven pull-forward in construction-related finance, and a further softening in first home buyer activity.

ABS head of finance and wealth Katherine Keenan said that while it was the largest fall since May 2020, owner-occupier commitments remained 76 per cent higher compared to a year ago and 64 per cent higher than pre-Covid levels in February 2020.

“The largest contribution to the fall in owner-occupier loan commitments was a fall of 17 per cent in the value of loan commitments for the construction of new dwellings,” Keenan said.

“In addition, there was no growth in lending for the purchase of existing dwellings.”

At a state level, Western Australia has the weakest result, down 5.8 per cent over the month, while Victoria was down 5.2 per cent and NSW down 2.4 per cent, the latter showing no apparent disruptions due to the recent lockdown.

The fall in construction lending follows a period of rapid growth between July 2020 to February 2021 in which the value of loan commitments rose by 150 per cent.

As well, the slowdown in overall lending follows a third consecutive monthly fall in dwellings approvals, which peaked at about $23 billion in March after an almost year-long climb from a low of $12.7 billion in June 2020.

Westpac senior economist Matthew Hassan said building approvals, up 56 per cent across the year in value terms, were now very likely to fall below their pre-HomeBuilder level.

“Construction finance approvals dropped 9.6 per cent in value terms and over 18 per cent in number terms,” Hassan said.

“There is likely more weakness to come.”

Despite this, demand from investors remained strong, with loans lifting 0.7 per cent in June to be double a year ago and at the highest level since early-2015.

Loans for renovations also lifted, up 7.4 per cent to a record $486.8 million.

AMP Capital chief economist Shane Oliver said first home buyer finance had continued to decline from its peak in January and had fallen back from 25 per cent of total finance in December to now be 19.7 per cent.

“While it led the charge higher, helped by various incentives and investors retreating on the back of tighter lending standards and weak unit rental markets, first home buyer demand appears to have peaked as the HomeBuilder incentive has come to an end,” Oliver said.

“Demand has been brought forward and worsening affordability is starting to bite.”

By value, first home buyer loan commitments accounted for 31.2 per cent of all owner-occupier commitments in original terms, excluding refinancing, in June.

First home buyers also took out larger mortgages during the pandemic, reflecting higher housing prices.

According to ME Bank, the average loan size for single mortgage applications has risen by 1 per cent to $405,755.

First home buyers now need an additional four months on average to save a deposit on an entry-level house, according to Domain.


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RBA holds rates at August meeting, experts call for stamp duty changes


The RBA has held interest rates at a record low 0.1 per cent at its August meeting.

RBA Governor Philip Lowe’s comments on the housing market were much the same, noting all markets continuing to strengthen, with prices rising in all major markets.

He did cite an increase in borrowing by investors, and that given the environment of rising housing prices and low interest rates, the Bank is monitoring trends in housing borrowing carefully and it is important that lending standards are maintained.

The experts and economists surveyed in’s RBA Cash Rate Survey all called the cash rate hold, with 75 per cent predicting the increase won’t happen until 2023.

Tony Makin of Griffith University was the lone expert predicting the rate to rise before 2022.

“In coming months a clearer picture will emerge of underlying inflation trends both in the US and [in Australia]. The recent US inflation spike is unlikely to be temporary given the massive money supply increase, recovery from the pandemic, and substantial US fiscal expansion.”

AMP Capital’s Shane Oliver said the RBA is still a long way from meeting its conditions for a rate hike – namely inflation sustainably back in the 2–3% target range which will require full employment and wages growth sustainably above 3%. And the latest coronavirus outbreaks and lockdowns risk delaying progress towards its goals.

Over a third of experts (71%), called for a change in stamp duty.

They agree that changes need to be made to either stamp duty or government stimulus in order to help buyers enter the property market.

Just over half (54%) think that only stamp duty should be changed, while another third (29%) think neither should be changed.

Finder’s insights manager Graham Cooke said an easing of stamp duty could reduce the burden for first time buyers and establish a more even playing field.

“Stamp duty is essentially a tax that slows down the turnover of property. It discourages current homeowners from downsizing, which locks up some of the market. “A long-term land tax would provide a fairer long-term solution, while adding liquidity to the housing market,” Cooke said.


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Lockdowns more detrimental to buyers than hikes in fixed interest rates: mortgage brokers


Mortgage brokers say that lockdowns are far more detrimental to prospective homeowners looking to take out home loans than any potential fixed-rate hikes.

Some banks have already begun raising their fixed interest rates despite the Reserve Bank of Australia holding the cash rate at 0.1 per cent at its July board meeting, saying its central scenario was to keep it there until 2024.

But that rate increase will make no difference to buyers’ borrowing power if their pre-approval has since expired or they are looking to take out a home loan now, experts say.

Instead, the lockdowns have had far more wide-reaching impacts on affected buyers shopping around for a home loan, with some delaying plans for months and others shelving their plans altogether as more than half of the country’s population faces some restrictions across three states.

In NSW, Sydney entered its fifth week of stay-at-home orders, which has shut down a range of industries, including construction and retail, and has placed five entire local government areas into stricter conditions, banning residents from leaving for any work unless they are in essential services.

This has stopped many hopeful home owners from taking out a loan, said Rob Lees, Mortgage Choice Blaxland, Penrith and Glenmore Park principal.

“There is no doubt that for people in affected industries, they will not be able to get a loan. There is no way a bank will give a loan to a tradie if they’re not working during a lockdown,” Mr Lees said.

While banks have not changed policies, as they did last year, Mr Lees said, they do still ask for more information than usual, including whether applicants have been impacted by COVID-19.

Since the latest outbreak, he has placed several applications on hold until trades – from plumbers to beauticians – return to normal.

Fixed-rate increases were almost a “non-issue” as banks were assessing buyers’ borrowing power against the variable rate plus an extra 2.5 per cent as the serviceability buffer, he said.

Victoria’s snap lockdown – the fifth one for the state – is adding to the pent up demand for many house hunters who have put their plans on ice for months now due to the ongoing uncertainty.

Foster Ramsay Finance principal and mortgage broker Chris Foster-Ramsay said applicants need an uninterrupted six-week run of earning income to be able to apply for a home loan.

“There’s a whole lot of people who have sat on their hands in Melbourne for up to six months, if not more. Their plans are on hold, and that is very common down here,” said Mr Foster-Ramsay, adding that it was a responsible lending requirement since the Royal Commission into the financial sector.

“It’s not hard to find those [hopeful home owners] in affected industries – travel, hospitality, live performance – where they are doing whatever they can do to survive.”

But some banks are more understanding when it comes to some industries compared with others, according to Melbourne-based mortgage broker and Pearse Financial director Tom Pearse.

White-collar workers in accounting or legal industries were better placed to have a home loan application approved if employers were willing to write a letter outlining the length of reduced hours due to COVID-19, he said.

Meanwhile, in Queensland, the state has been barely affected by lockdowns, leaving most buyers with the same borrowing power even if fixed rates have increased since they began their house hunting months ago.

“The reason it doesn’t impact borrowing capacity as much is that the banks assess it on the ongoing variable rate, most of the time. It’s not assessed on the fixed-rate itself,” said Caroline Jean-Baptiste, Mortgage Choice Fortitude Valley mortgage broker.

She said the bigger impact for Brisbanites was that some banks were changing their assessment on expenditure around health insurance and private school fees.

“That had more of an impact than a rate change. Somebody, who a month ago could have borrowed $650,000 can now borrow $550,000 if they’re sending their children to a private school or have private health costs,” she said, adding that it was postcode-related.

“So, some lenders use a postcode to determine the benchmark living expenses that they will apply to a certain application.”


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