The Aussies at risk of being ‘mortgage prisoners’
AUSTRALIANS are being told to switch banks or look for a better deal on their home loans to avoid rate rises - but for many that may not be possible.
Digital Finance Analytics principal Martin North said a survey of Australians had found some may actually become "mortgage prisoners" as they won't be able to refinance their loans by switching to another bank with a lower interest rate.
"About 40 per cent of people who tried to refinance were unable to do so," Mr North said.
"If you go back a year, it was 5 per cent."
While some banks are advertising low interest rates to attract new customers, it was not that easy to get these loans because of the tougher lending standards that have restricted how much people can borrow.
"The standards were way too loose for a long time so a lot of people got loans they probably shouldn't have," Mr North said.
An omnibus phone survey that Mr North commissioned and his analysis of data from investment bank UBS showed these people may now find it difficult to refinance these loans.
"You've got about 40 per cent of these people who when they try to refinance, get rejected so they are locked into higher rate loans without any way to get out," he said. "That's why I call them mortgage prisoners."
Mr North said about half of the people applying for refinancing were doing it purely to get their monthly repayments down.
"They are struggling with bills and everything else," he said.
Homeowners also seem to be bracing for a fall in property values, with about 20 per cent refinancing their loans to get access to some "rainy day money" now, while the equity in their homes are higher.
Mr North said if housing prices dropped, their homes could be worth less and the equity would be lower. This could stop them borrowing as much money off the value of their home so some appear to be taking out loans now, to have extra money available if finances became tighter in the future.
"They can use the money as a buffer," Mr North said. "It's cheaper than using a credit card, which has an interest rate of about 20 per cent. A mortgage has an interest rate of about 4 or 5 per cent."
The danger is if house prices did fall their loans may be higher than what their homes are worth, so they could still owe money if they are forced to sell.
Mr North said he had noticed mortgage brokers were now trying to help clients to get their expenses down before they made loan applications.
He said some people were even getting loans that included a clause that they had to reduce their expenditure.
"How on earth you police that, I have no idea," he said. "If you say you're doing to cut your expenses but you don't, who's liable?"
But not everyone will have trouble refinancing, those who are considered low risk with a good track record on their income and who have their costs under control, can probably get a better deal.
Mr North said people who wanted to get the best deals should try to get their expenses down and make sure they could be tracked via bank statements for example.
It's worth doing because small increases can add a lot over time.
This week Westpac lifted its variable home loan rate by 0.14 per cent to 5.38 per cent per year for owner-occupier properties with principal and interest repayments.
Households will have to pay an extra $35 a month for interest for an average mortgage of $300,000, while those with a $500,000 mortgage will pay an extra $43 a month.
Over 30 years, this would be an extra $12,600 to $15,480.
Prime Minister Scott Morrison encouraged unhappy customers to vote with their feet, saying competition is important to a strong and accountable banking system. "If you don't like what Westpac's done, go to another bank," the prime minister said.
Finder.com.au money expert Bessie Hassan said low home loan rates have become expected in today's market.
"If yours doesn't have a 3 in front of it, you could be doing better for yourself," she said.