A client of ours was paying around 7% on his home loan.
There were other lenders offering rates around 6%, his financial position had improved, and refinancing would have reduced both his interest rate and monthly repayments.
It sounded relatively straightforward.
The problem was that most lenders were telling him he couldn’t afford the cheaper loan.
It sounds ridiculous, but it’s a situation I’ve seen quite a few borrowers find themselves in, particularly while interest rates remain around their highest levels in more than a decade.
My client thought he had become what’s commonly referred to as a mortgage prisoner.
What is a mortgage prisoner?
A mortgage prisoner is essentially someone who is stuck with their existing lender because they can’t meet the servicing requirements to refinance elsewhere.
The frustrating part is that the loan they’re trying to refinance to might actually have a lower interest rate and lower monthly repayments than the loan they’re already successfully paying.
That’s exactly what happened with this client.
He’d been comfortably making his repayments at around 7% and wanted HKW Finance to look at his options now that his business financials had improved.
We found plenty of options around 6%.
But there was another number causing the problem: 9%.
Why would a bank assess a 6% home loan at 9%?
When a lender assesses a home loan application, they generally don’t just assess whether you can afford the repayments at the actual interest rate.
They apply a servicing buffer on top.
So, as a simplified example, a new home loan with an interest rate of 6% might need to be assessed as though the rate were around 9%.
The idea is to make sure borrowers could continue meeting their repayments if interest rates increased.
That makes sense when someone is taking on new debt.
It can become a little more frustrating when you’re simply trying to replace an existing loan with a cheaper one.
My client had already demonstrated that he could make repayments at around 7%.
Refinancing to 6% would reduce his actual repayments.
But because he couldn’t demonstrate that he could afford the loan at the higher assessment rate used by many lenders, a standard refinance wasn’t working.
Streamlined refinancing can provide another option
Fortunately, this doesn’t necessarily mean you’re stuck with your current lender forever.
Some lenders have introduced streamlined or alternative refinance assessment policies for eligible borrowers.
Depending on the lender and your circumstances, these policies can reduce the usual servicing buffer or assess an existing home loan differently from someone taking on additional debt.
That can potentially give borrowers who have a good repayment history another pathway to refinance onto a lower rate.
It isn’t available to everyone, and things such as your repayment history, current loan, income, property value and overall financial position will still matter.
But it’s an option many borrowers simply don’t know exists.
This can be particularly important for business owners
Business owners can have another layer of complexity because lenders don’t all assess self-employed income in the same way.
One lender might want your latest tax returns and financial statements.
Another may be able to use director’s wages, BAS, an accountant’s letter or another form of income verification depending on the circumstances, as we’ve explored in our previous article on the four ways lenders assess self-employed borrowers.
So you can end up with two very different refinance outcomes from the same set of numbers.
That’s why being told you can’t refinance by your existing bank, or even another lender, doesn’t necessarily mean you’re a mortgage prisoner.
It may simply mean you’ve been assessed using a policy that doesn’t suit your situation.
Before accepting your life sentence to a higher rate
If you’re paying a higher interest rate than you’d like and have assumed refinancing isn’t possible because of borrowing capacity, it’s worth checking what options are actually available.
Particularly in a higher-rate environment, even a relatively small reduction in your interest rate can make a meaningful difference to your monthly repayments and the amount of interest you pay over time.
For business owners, that means working with someone who understands both your business income and the different rules lenders use to assess it.
You may genuinely be stuck with your current lender for the time being.
Or you might find that you’re not quite the mortgage prisoner you thought you were.
Not sure whether refinancing is an option for you? Book a consultation with HKW Finance to explore your refinancing options and find out what may be available for your circumstances.