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Number of mortgage prisoners likely to rise under threat of further cash rate rises

By Kyle Robbins
07 March 2023 | 11 minute read
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With the threat of a further cash rate increase looming over many Australians’ shoulders, new research has revealed the proportion of home owners who’ve entered mortgage prison since last May.

Data from the Compare Club has indicated a 42 per cent increase in the number of Australians residing in mortgage prison since the Reserve Bank of Australia (RBA) began its inflation-fighting cash rate rises in May 2022, with households in NSW struggling the most.

Based on 6,725 refinancing enquiries, Compare Club found the percentage of Australians with a loan-to-value ratio (LVR) of 91 per cent or more grew from 14 per cent in April 2022 to 20 per cent last month. 

NSW reported the largest increase in refinance enquiries by home owners with an LVR above 91 per cent, up from 5 per cent between last April and February, followed by the 4 per cent jump in Victoria.

Conversely, the portion of refinancers above this LVR threshold fell during the same period from 13 per cent to 11 per cent.  

Compare Club chief executive officer, Lance Goodman, explained that “the risk with highly leveraged loans in a falling property market, is that an Australian’s property’s value can fall below their loan amount, placing them in negative equity.”

A combination of nine consecutive cash rates and a downturning housing market, resulting in home values recording their largest annual fall in 2022, has produced an increase in mortgage prisoners. 

“Borrowers in a negative equity situation are prisoners of circumstance,” he said. Adding refinancing will prove difficult for home owners unless a “new bank values their home more highly than their current one, or they have enough savings to pour back into their loan and reduce the capital amount.” 


He described the situation as “particularly galling for these home owners as they can see better rates and cashback offers from other lenders getting further out of reach.”

With APRA’s much-maligned serviceability buffer remaining at 3 per cent, Mr Goodman outlined that “many people who are rolling off cheap mortgages this year will have been assessed at their ability to pay at around 5 per cent when the reality is a lot of home owners will be facing a rate of 6 per cent or higher.”

These current rates are “far in excess of what their lender originally thought they could pay.” 

With an RBA estimation positing 800,000 Australians rolling off “ultra-cheap fixed rates this year,” Mr Goodman said, “many of these will be at risk of getting locked into mortgage prison.” 

For this reason, he believes it is “vital to be proactive,” urging borrowers in this predicament to engage in conversations with their brokers and lenders to “see what’s feasible.”

With several economists and Australia’s big four banks predicting further cash rate increases, Mr Goodman explained swift action is paramount. 

“Even if you do find yourself with a high LVR, don’t lose hope. Brokers and other financial experts may be able to help and there are often tactics you can employ to give yourself a little breathing room,” he concluded.

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