Stuck in “mortgage prison”? 4 things you can do about it
Homeowners can refinance to pay less for their mortgage. But what if that's not an option for you?
In news that will surprise precisely no one, Aussies are really stressed about money right now. According to Finder's Consumer Sentiment Tracker, 73% of us are "somewhat" or "extremely" stressed about the state of our finances.
A big driver of this is mortgages. Soaring home loan interest rates have added hundreds, if not thousands to monthly repayments over the last 10 months.
One way to fight back is to refinance to a cheaper rate, or even get a mortgage with a cashback offer worth a few thousand dollars.
But for some, refinancing is simply not an option. As rates go up, your borrowing power goes down. Recent rate hikes mean you need a $180,000 salary to qualify for an average $500,000 mortgage – up from $120,000 this time last year.
Bottom line – many people are stuck in "mortgage prison", unable to refinance because they won't be approved for a new loan, but also struggling to manage the repayments they're stuck with right now.
If you're in this boat, you have a few options:
1. Request a new, longer loan term
Most home loans are spread over 30 years. If you've had your home loan for 5 years, you have 25 years remaining. You could ask your bank to re-amortise your loan over a new 30-year period (or if possible, even 35 years).
At the same time, you can refinance a lower overall amount. If you started with a $500,000 loan and you've repaid $40,000, then your new loan will have a lower starting balance of $460,000.
Yes, this involves refinancing, which you thought you weren't able to do. But because you're applying for a lower-value loan over a longer period, your monthly repayments will be lower, boosting your chances of being approved.
You could cut $220 a month off a $500,000 principal and interest loan at 5% by refinancing the remaining $460,000 debt over a new 30-year period.
Need to know: You'll pay more interest in the long run, but you can always refinance again to a shorter loan term in a few years when rates are lower or your financial situation has improved.
2. Move to interest-only repayments
Moving to interest-only repayments for a short period can take the pressure off temporarily. You stop making any contributions towards the loan amount and repay only the interest each month.
Banks don't love giving owner-occupiers these loans. They really want to see you make headway with your debt – you're less risky that way. So generally, you'll need to give the bank a convincing argument as to why this is a good idea.
For instance, you might have kids moving out of childcare and into public school in a couple of years, so you'll save money on childcare and return to full-time work. You'll be able to service a higher repayment.
On a $500,000 principal and interest loan at 5%, moving to interest-only, your monthly repayments drop from $2,685 to $2,085 – saving $600 a month.
Need to know: Your repayments will get higher once you move back to principal and interest because you have to make up for lost time. But this might be a worthwhile trade-off if it lowers the risk of falling well behind on repayments or losing your home.
3. Contact your bank for hardship assistance
If you're struggling with your mortgage repayments, contacting your bank and looping it in on this fact can feel like the absolute last thing you want to do.
But it might be able to help. Every bank has a hardship policy, with applications assessed on a case-by-case basis. It might offer you one of the loan changes we've discussed already or you might be eligible to take a temporary mortgage repayment holiday.
Banks have several options in their toolkit and they'll work with you to get back on even footing.
New Finder research shows only 2% of mortgage holders have asked their bank for hardship assistance or a repayment holiday in the last 6 months.
Need to know: It's important to do this sooner than later as the options your bank can offer you dwindle once you miss multiple repayments and fall into arrears.
4. Reach out for debt counselling
If it's more than just your home loan you're struggling with, reach out to the National Debt Helpline (NDH) for support.
"There are ways to make your debts more manageable so that you can breathe a bit easier," it states on its website.
It can help you prioritise your debts, consolidate loans, negotiate payment terms and get to know your rights.
The National Debt Helpline can also help you access government grants, concessions and the No Interest Loan Scheme.
Need to know: You might feel overwhelmed, but there are steps you can take to help relieve the financial pressure. Contact the NDH on 1800 007 007 or visit its website.
There's no need to go it alone
I've been a property and finance journalist for almost 20 years and I remember how dire things got for mortgage holders after the GFC. One thing to keep in mind is that the mortgage market constantly changes. Back in 2008, rates were above 7%. In 2020, they dropped to below 2%! None of us know what's around the corner (not even the Reserve Bank governor who decides the cash rate), so don't try to sort it all out on your own. Help is available to get through this challenging period.
