What is mortgage prison?
Mortgage prison is the term used to describe a borrower who cannot refinance their home loan, even when doing so could reduce their repayments or put them on a better deal.
The “prison” metaphor is apt. You may be able to see lower rates and better loan products offered by other lenders, but you may not qualify for them. As a result, you can be stuck with your existing loan even when more competitive options are available.
You may be making your mortgage repayments on time and comfortably managing your current loan. But when another lender assesses your application, factors such as your income, debts, property value, loan balance and the lender's serviceability requirements can prevent you from refinancing.
That can leave you paying a higher interest rate than you could otherwise access, with limited ability to switch lenders.
Mortgage prison does not necessarily last forever. As your financial position, loan balance, property value or lender policies change, you may become eligible to refinance.
Why can't you refinance your home loan?
If you're able to afford your current mortgage, it doesn't necessarily mean you can qualify for a new one. When you refinance with another lender, your application is assessed against that lender’s lending criteria.
For some borrowers, that assessment can create a problem. You may have a good repayment history and enough income to meet your current repayments, but still fall short of what a new lender requires. Here are a few reasons this might happen:
You no longer pass the lender’s serviceability test
When you apply to refinance, the lender needs to be satisfied that you can continue making your repayments if your financial circumstances changed, or interest rates rose. So they don't check your repayment capacity at the rate you apply for but at a higher rate to stress test your income. This is the serviceability buffer.
For loans assessed by APRA-regulated banks, the current minimum serviceability buffer is 3 percentage points above the loan interest rate.
This can sometimes be problematic for existing borrowers. If your current mortgage rate has risen since you first took out the loan, a new lender may assess your ability to repay at a significantly higher rate than the one you are actually paying.
For example, a borrower with a 6% loan could be assessed at a rate of 9%. Even if they have been comfortably making their 6% repayments, they may not have enough assessed borrowing capacity to refinance the same debt.
You don't have enough equity
Your property's value and the amount you owe determine your loan-to-value ratio (LVR).
If your property has fallen in value or your loan balance hasn't reduced much, your LVR may be higher than it was when you originally took out the mortgage. A high LVR can reduce the number of lenders willing to refinance you and may also affect the cost of the new loan.
Your financial circumstances have changed
Your income, expenses and debts may look very different from when you first got your mortgage.
A new lender may take into account things such as a change in employment, reduced income, additional debts or higher regular expenses. Even if your existing lender is comfortable with your current repayments, another lender may reach a different assessment outcome.
Missed repayments, defaults, multiple recent credit applications or other changes to your credit history can make refinancing more difficult.
The important thing is that mortgage prison usually isn't caused by one single factor. It can happen when the gap between the loan you have and the loan you can qualify for becomes too wide.
Are you in mortgage prison?
Seeing a lower rate advertised doesn't necessarily mean you can switch to it. The real question is whether you could qualify for that loan today.
You may be a mortgage prisoner if you can comfortably manage your current home loan but can't qualify for a more competitive loan elsewhere. These checks can help you work out where you stand.
1. Is your current home loan uncompetitive?
Start by looking at your current interest rate and comparing it with similar loans available to borrowers in a similar position.
A lower advertised rate doesn't automatically mean you would save money, but it is worth checking your options if you see a large gap.
2. Can you afford your current repayments?
If you're comfortably making your repayments but can't qualify for another loan, that's a sign of potential mortgage prison.
This is different from mortgage stress. Mortgage stress is about struggling to meet your existing repayments. Mortgage prison refers to being unable to move to a better loan, even when you can manage the loan you already have.
3. Would another lender actually approve you?
The rate you see advertised is only relevant if you meet the lender's eligibility and serviceability requirements. A lender will assess your income, expenses, debts, credit history and other relevant information before deciding whether to approve your application.
So don't assume that seeing a lower rate means you're able to refinance to it.
4. How much equity do you have?
Your LVR can have a big impact on your refinancing options. If you owe $500,000 on a property worth $600,000, your LVR is about 83%. If the property is worth $700,000, your LVR falls to about 71%. That difference can affect which loans you qualify for and whether additional costs, such as LMI, may apply.
5. Has your financial position changed?
Think about what has changed since you took out your current mortgage.
Have your income or employment circumstances changed? Have you taken on new debts? Are your household expenses higher? Has your property value changed?
Sometimes, nothing seems to have changed, but lifestyle creep can quietly work against you. Higher everyday spending can reduce your borrowing capacity, even if your income has increased since you first took out your mortgage.
If your current mortgage is affordable, your existing rate is no longer competitive, but you can't qualify for a better loan elsewhere, you may be in mortgage prison.
Are you still a mortgage prisoner if you can make your repayments on time?
Mortgage prison doesn't mean you can't afford your current repayments. In fact, many mortgage prisoners are paying their mortgages on time every month. The prison is specifically about the inability to switch, not the inability to pay.
This distinction matters because it means the problem is systemic, not personal. Borrowers are trapped not because they are financially irresponsible, but because a regulatory framework designed to protect them from over-borrowing, in a higher-rate environment, also prevents them from accessing a better deal.
Is mortgage prison the same as mortgage stress?
No. Mortgage stress occurs when your repayments consume too high a proportion of your income, typically defined as 30-45% of household income. Mortgage prison is specifically about the inability to refinance. The two can overlap: a borrower under mortgage stress may desperately want to switch to a lower rate but be in mortgage prison because they cannot pass the serviceability test needed to do so.
What can you do if you’re stuck in mortgage prison?
Being unable to refinance today doesn't necessarily mean you have no options. The right approach depends on what's preventing you from qualifying for another loan.
Ask your current lender for a better deal
You don't always have to switch lenders to get a lower rate. Banks often use sharper rates and discounts to attract new customers, while existing borrowers can end up paying more simply because they haven't asked for a better deal.
If you've been a reliable borrower, your lender may have an incentive to keep your business rather than see you refinance elsewhere. A quick call to ask for a lower rate or a better-priced loan may be enough to improve your deal.
Ask whether your lender can offer you a lower rate or move you to a more competitive loan product. It can be much simpler than refinancing, particularly if your financial circumstances haven't changed.
Check whether you qualify for a different refinance assessment
For APRA-regulated lenders, the standard serviceability buffer is currently 3 percentage points above the loan's interest rate. APRA also allows lenders to make prudent exceptions to their standard lending policies, including for some borrowers who are refinancing. These exceptions are subject to the lender's own policies and risk limits.
You may also be able to consider a non-bank lender. Non-banks aren't subject to APRA's prudential requirements in the same way as ADIs, so they can use their own lending and serviceability policies. That doesn't mean they will automatically approve you or offer a better deal, but their assessment may suit your circumstances differently.
Don't respond to a rejection by applying everywhere. A credit application can appear on your credit report, and multiple applications in a short period can affect your credit score.
Instead, find out why your application was rejected first. If the issue was serviceability, equity or another lending criterion, you can then look for a lender whose policy is genuinely suited to your circumstances.
Being rejected by one lender doesn't necessarily mean you can't refinance. But the next application should be informed, not a guess.
Check your property's current value
Your property may be worth more than you think. If its value has increased since you bought it, your LVR may be lower than you expect. That could give you access to more refinancing options and potentially reduce the cost of switching.
On the other hand, if your property's value has fallen, you may have less equity than you had when you took out the loan.
Reduce other debts and commitments
Other debts can affect how much you can borrow.
Paying down a credit card, personal loan or other debt may improve your borrowing position. Even unused credit card limits can affect a lender's assessment, so it's worth understanding how your existing commitments are being treated.
Reassess your options later
Being unable to refinance today doesn't necessarily mean you'll be stuck with your current loan forever.
Your financial position can change over time. You may pay down your mortgage, build more equity as your property value increases, reduce other debts or see your income improve. Any of these changes could improve your borrowing capacity and make refinancing possible.
So if you can't refinance today, find out what is preventing you from qualifying and work on that first. Then review your options again when your circumstances have changed.
