75% of borrowers at risk of becoming ‘home loan hostages’

Three-quarters of mortgage holders are at risk of becoming “home loan hostages” due to their lifestyle and financial decisions according to new research.

According to Mozo, borrowers that are planning on making big life decisions that have financial implications over the next 12 months could put themselves at risk of being rejected by a new lender and see them stuck with their current home loan.

The research found that 19% of borrowers were planning to change jobs, 8% expected to have a child and 18% are looking at taking out a new credit card, personal loan or car loan.

Decisions that could hurt borrowers from being approved for a new home loan.

Mozo Director, Kylie Moss said, “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.”

“The key difference between a home loan hostage and a mortgage prisoner is that a hostage may temporarily find it difficult to refinance. 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.”

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Rate rises to hit budgets

The home loan hostage crisis comes as the tenth consecutive rate rise from the RBA was announced this month. This put further pressure on household budgets.

According to the research, 23% reported that they will not make regular savings over the next 12 months, 13% said their household income would reduce and 12% said they would need to significantly increase their spending.

Ms Moss said, “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.”

Serviceability buffers impacting borrowers

On top of higher interest rates, the serviceability buffer imposed by APRA on banks, also makes it more difficult for new borrowers to access finance.

The research found that 37% of borrowers are not aware that lenders apply a 3% serviceability buffer to the home loan rate at the time of application, which factors in a borrower’s capacity to meet higher home loan repayments should rates increase.

Ms Moss said, “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 the application.”

Article source: Queensland Property Investor