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Weekly Finance Update – Being locked in a ‘mortgage prison’

February 18, 2023

Welcome to the finance update for the week ending 18 February, 2023.

As expected, all of the four major banks have passed on the full RBA rate increase. With bank profits at such dizzy heights, at want point do the they need to be called out for chasing profits at the expense of increasingly vulnerable borrowers? Having said that, the RBA wants the increases to hurt the hip pockets of Australians, so they would be disappointed if lenders didn’t act upon the rises.

In this week’s newsletter, in the wake of yet another interest rate rise, we look at what is known “mortgage prison’.

Up to one in five Australian mortgage holders could find themselves unable to refinance thanks to the climbing interest rates, and stringent mortgage ‘stress testing’.

Such borrowers, said to be in “mortgage prison”, cannot refinance to a cheaper loan because they no longer meet the bank’s lending requirements.

Stress testing.

Banks are currently offering mortgage rates of around 5%, but new customers must prove they could still make repayments if their rate rose to 8% – the 3% buffer required by the Australian Prudential Regulation Authority.

Stress testing is a really important exercise designed to protect the borrower, the lender, and the broader economy. When interest rates were much lower, the 3% buffer whilst always there, was not nearly as much of an issue for borrowers.

The impact.

A person who took out a loan in July 2021 (when the RBA cash rate was 3% lower than it is now) and borrowed to their maximum limit of $700,000 would only be able to borrow $577,000 with a different lender in today’s market, which could stop them from being able to refinance to a lower rate.

This means that a borrower could be stuck with a loan product that is no longer competitively priced, potentially costing them thousands of dollars each year.

The solution.

Unfortunately there may not be a solution in the short term. As discussed in a previous newsletter, one of the things that we can do for our clients is put in a repricing request for the borrower in the hope that the clients current lender agrees to reduce their interest rate to a more competitive figure.

Any changes in interest rates from last week are highlighted in orange.

Note – Increases announced by lenders as a result of RBA decisions normally take 1-2 weeks to come into affect.

Standard Variable

The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.

1 Year Fixed

The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.

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