What is a mortgage prisoner?
Stuck in a loan you can’t refinance? Learn what being a mortgage prisoner means, why it happens, and how Australians can break free.
A mortgage prisoner typically refers to anyone with a mortgage who is unable to refinance their home loan or faces difficulty in servicing their home loan. It has nothing to do with whether or not you’re a good borrower but rather the lack of serviceability and/or security that you may have.
Serviceability refers to your ability to repay your debt. This could be due to factors such as:
- Your home declining in value causing your loan-to-value ratio to increase
- Interest rate rises
- Your income being reduced
If the price of your property has fallen and pushed your Loan to Value Ratio (LVR) above the 80% mark, you could find that when you go to refinance you won’t be able to without having to pay Lenders Mortgage Insurance (LMI).
Here are three ways to help you maintain control over your home loan situation and avoid becoming a mortgage prisoner.
Make additional repayments
One of the most straightforward ways to avoid the mortgage prisoner scenario is by making additional payments on your mortgage, by paying more than the minimum required. This approach reduces your principal balance faster, potentially leading to more favourable refinancing options.
However, be mindful of market fluctuations. If your property's value decreases while you're making additional payments, this could still leave you vulnerable to becoming a mortgage prisoner due to the reduced equity.
Reduce expenses
Another effective strategy is to diligently manage and reduce your expenses. This step is particularly helpful if you're facing serviceability issues with your mortgage.
Reviewing and trimming your budget, especially discretionary spending, can free up more funds for your mortgage payments. While there's a limit to how much one can cut back on expenses, even small reductions can add up over time, decreasing the likelihood of becoming trapped in an unfavourable mortgage situation.
Minimise other debts
It’s important to manage debts outside of your mortgage, such as credit card balances. When assessing your loan application, lenders consider all your credit obligations, including potential credit card limits, even if they're not currently used, as part of their serviceability assessment.
To improve your chances of successful refinancing and reduce your debt-to-income ratio, consider reducing your credit card limits or closing unused accounts. This step will lower the amount lenders consider as your potential debt, enhancing your overall financial standing.
By considering to implement the above, it could improve your financial flexibility and avoid the constraints of becoming a mortgage prisoner.
Unloan is a division of Commonwealth Bank of Australia.
Applications are subject to credit approval, satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000, and total borrowings per customer across all Unloan loans is $10,000,000. (For purchase loans a minimum 10% equity is required - however a Lenders Mortgage Insurance (LMI) premium and higher interest rate apply. In some cases, depending on the property’s location or type, an LMI premium may also be required for LVR between 70.01% to 80%). For loans with Lenders Mortgage Insurance (LMI) the minimum loan amount is $10,000, maximum loan amount is $3,000,000 and total borrowings per customer across all Unloan loans is limited to $3,000,000).
Unloan offers a 0.01% per annum loyalty discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The discount is applied for each loan you have with Unloan.
*At Unloan, we do not charge any annual, application, banking, account, transaction, late or exit fees. In certain circumstances you may be required to pay a Lenders Mortgage Insurance (LMI) premium. Learn more about why this is applied and how it works. Government fees may also apply. Learn more about government fees here. Your current lender may charge an exit fee when refinancing.
Tax law is complex and subject to change. For the latest information, check the ATO website or with your accountant or financial advisor.
Unloan is a division of Commonwealth Bank of Australia is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.
Applications are subject to credit approval, satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000, and total borrowings per customer across all Unloan loans is $10,000,000. (For purchase loans a minimum 10% equity is required - however a Lenders Mortgage Insurance (LMI) premium and higher interest rate apply. In some cases, depending on the property’s location or type, an LMI premium may also be required for LVR between 70.01% to 80%). For loans with Lenders Mortgage Insurance (LMI) the minimum loan amount is $10,000, maximum loan amount is $3,000,000 and total borrowings per customer across all Unloan loans is limited to $3,000,000).
Unloan offers a 0.01% per annum loyalty discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The discount is applied for each loan you have with Unloan.
*At Unloan, we do not charge any annual, application, banking, account, transaction, late or exit fees. In certain circumstances you may be required to pay a Lenders Mortgage Insurance (LMI) premium. Learn more about why this is applied and how it works. Government fees may also apply. Learn more about government fees here. Your current lender may charge an exit fee when refinancing.
Applications are subject to credit approval, satisfactory security and minimum deposit requirements. Full terms and conditions are found on our Unloan Terms and Conditions. Modified Terms and Conditions will be set out in our Notice of Variation Agreement, if you are approved. This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice.
