Unlocking Freedom: Refinancing Options for Mortgage Relief
Borrowers have had a steady stream of grim monthly reminders from their lenders advising that their mortgage repayments are increasing… again.
With so many rate rises, some borrowers are now stuck in a so-called mortgage prison. This happens when you are unable to refinance to a cheaper interest rate on your home loan with another lender because rate rises mean your borrowing power and loan serviceability has decreased, so you are unlikely to be approved if you apply anywhere else. And you are paying sky-high repayments, which may be higher than you’d pay with a different bank.
If You Are Stuck in Mortgage Prison, What Can You Do About It?
If you find yourself in a position where you are unable to refinance to a cheaper lender, there may be a few things you can do about it.
First, look at your overall debts. Personal loans and credit cards can seriously impact your borrowing power and loan serviceability because the banks see them as an ongoing obligation that eats away at your financial safety net. They also consider your full credit limit as debt, not just the balance you have outstanding.
So, if you have $30,000 in credit card limits but zero dollars owing, your lender will assess that as a $30,000 debt and allocate 304% of that debt limit ($900 to $1,200) as a monthly repayment. Therefore, cancelling any credit cards you don’t need, or substantially reducing the limit, can make a big difference towards getting you out of mortgage prison.
This is one strategy that we recommend to help get into a stronger financial position when applying for finance.
There are other ways to help manage the situation too, including the following.
Expert Tips to Negotiate with Your Current Lender
Phone the Bank
Call them and ask to speak to the retention team. These are the people in customer service whose job it is to keep customers with the bank, so they can look at your loan and see if there is any ability to reduce the rate paid.
What Are New Customers Getting?
Ask what rate new customers are getting and how does it compare to your rate. If it is lower, is there a reason you are being penalised and can you access the same rate?
Ask for Other Savings
If they cannot reduce your interest rate, is there anything else they can do to help manage your mortgage? For example, a mortgage repayment holiday, switching temporarily to interest-only payments, fee waivers or discounts on insurance premiums on credit card annual fees.
This all requires some time and effort, and you do not always know what question to ask or what options you have. Working with a mortgage broker can help you manage your mortgage and add value to this tricky business of refinancing.
Frequently Asked Questions
What is Mortgage Prison?
Mortgage prison refers to the situation where borrowers are unable to refinance to a cheaper interest rate with another lender due to rate rises affecting their borrowing power and loan serviceability.
How Do Credit Cards and Personal Loans Affect My Ability to Refinance?
Credit cards and personal loans can impact your borrowing power because banks consider them as an ongoing obligation. Even if you owe zero dollars on a credit card with a $30,000 limit, the bank will assess that as a $30,000 debt.
What Can I Do If I'm Stuck in Mortgage Prison?
If you find yourself unable to refinance, you can look at your overall debts and consider reducing or canceling credit cards you don't need. This can improve your financial position and potentially allow you to refinance.
How Can I Negotiate with My Current Lender?
You can call your bank and ask to speak to the retention team, who are responsible for keeping customers. They can look at your loan and see if there's any ability to reduce the rate you're paying.
What Other Savings Can I Ask For?
If your lender can't reduce your interest rate, you can ask for other ways to manage your mortgage, such as a repayment holiday, switching to interest-only payments, or fee waivers.
Can a Mortgage Broker Help Me?
Yes, a mortgage broker can help you manage your mortgage and create a strategy that could allow you to refinance in the future. They can also help you negotiate with your current lender.
Get in Touch
If you are stuck in mortgage prison and you have explored these options to no avail, a mortgage broker may be able to create a strategy and a roadmap that could allow you to finance in 6 to 12 months' time.
Zippy Financial is an award-winning mortgage brokerage specialising in home loans, property investment, commercial lending, and vehicle & asset finance. Whether you are looking to buy your first home, refinance or build your property investment portfolio, the team at Zippy Financial can help find and secure the right loan for you and your business.
About the Author:
Louisa Sanghera is an award-winning mortgage broker and Director at Zippy Financial. Louisa founded Zippy Financial with the goal of helping clients grow their wealth through smart property and business financing. Louisa utilises her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients achieve their lifestyle and financial goals. Louisa is an experienced speaker, financial commentator, mortgage broker industry representative and small business advocate.
Louisa Sanghera is a Credit Representative (437236) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025).
Disclaimer: This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether business, health or financial.