This article is from the Australian Property Journal archive
THREE-quarters of Australian home loan borrowers are at risk of being locked in with their current lender, as a result of lifestyle financial decisions amidst the cost of living crisis.
According to new research from Mozo, 75% of mortgage holders may become “home loan hostages”, leaving them unable to refinance their home loan to a new lender.
“Home loan customers might be unaware that when they go to refinance their home loan with a new lender, they are assessed as though they are a new borrower, taking into account their financial standing beyond their history of meeting repayments and their LVR,” said Kylie Moss, director at Mozo.
Many mortgage customers are planning on making major decisions over the next 12 months that could have significant financial implications, with 19% planning on changing jobs and 8% planning on having a child.
While 18% are planning on taking out a new credit card, personal loan or car loan over the next 12 months.
“The key difference between a home loan hostage and mortgage prisoner is that a hostage may temporarily find it difficult to refinance,” added Moss.
“While a prisoner is someone who is facing extreme financial hardship and is unable to refinance their mortgage and may have to default on their repayments, apply for financial hardship, or sell their property.”
This research comes as interest rates reached 3.6%, while data from Moody’s revealed that one in seven low income households had a buffer of less than three months and a debt-to-income ratio above four.
Other financial and lifestyle changes that could impact refinancing capacities are 23% of borrowers not making regular savings, 13% having income reduced and 12% significantly increasing their spending.
“Cost of living pressures and rising interest rates have seen many Aussies struggling to adjust their cash flow. Unfortunately, this could mean borrowers who look to refinancing for financial relief could be knocked back,” said Moss.
Research also found that 37% of borrowers aren’t aware that lenders apply a 3% serviceability buffer to the home loan rate at the time of application.
With a borrower applying to refinance an average variable rate of 5.85% being assessed on their ability to make repayments at a rate up to 8.85%.
For a $500,000 loan a customer wouldn’t be assessed on their ability to pay the $3,176 a month required at the current interest rate, but $4,145 a month.
“Aussies who are planning on refinancing over the next year should forward plan big life and financial decisions to avoid becoming a home loan hostage, as well as see if they can tighten up their cash flow in the months leading up to application,” concluded Moss.
