What is a mortgage prisoner?

It’s important to understand what the term ‘mortgage prisoner’ is as it’s something you want to avoid.

A mortgage prisoner typically refers to anyone with a mortgage who is unable to refinance their home loan or faces difficulty in servicing their home loan. It has nothing to do with whether or not you’re a good borrower but rather the lack of serviceability and/or security that you may have.

Serviceability refers to your ability to repay your debt. This could be due to factors such as: 

  • Your home declining in value causing your loan-to-value ratio to increase
  • Interest rate rises 
  • Your income being reduced 

If the price of your property has fallen and pushed your loan to value ratio (LVR) above the 80% mark, you could find that when you go to refinance you won’t be able to without having to pay Lenders Mortgage Insurance (LMI).

Here are three ways to help you maintain control over your home loan situation and avoid becoming a mortgage prisoner. 

Make additional repayments

One of the most straightforward ways to avoid the mortgage prisoner scenario is by making additional payments on your mortgage, by paying more than the minimum required. This approach reduces your principal balance faster, potentially leading to more favourable refinancing options. 

However, be mindful of market fluctuations. If your property's value decreases while you're making additional payments, this could still leave you vulnerable to becoming a mortgage prisoner due to the reduced equity.

Reduce expenses

Another effective strategy is to diligently manage and reduce your expenses. This step is particularly helpful if you're facing serviceability issues with your mortgage. Reviewing and trimming your budget, especially discretionary spending, can free up more funds for your mortgage payments. While there's a limit to how much one can cut back on expenses, even small reductions can add up over time, decreasing the likelihood of becoming trapped in an unfavourable mortgage situation.

Minimise other debts

It’s important to manage debts outside of your mortgage, such as credit card balances. When assessing your loan application, lenders consider all your credit obligations, including potential credit card limits, even if they're not currently used, as part of their serviceability assessment. To improve your chances of successful refinancing and reduce your debt-to-income ratio, consider reducing your credit card limits or closing unused accounts. This step will lower the amount lenders consider as your potential debt, enhancing your overall financial standing.

By considering to implement the above, it could improve your financial flexibility and avoid the constraints of becoming a mortgage prisoner. 

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This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking financial advice before making any decision based on this information.‍

This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking financial advice before making any decision based on this information.

Unloan is a division of Commonwealth Bank of Australia.

Applications are subject to credit approval; satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000.

^ Unloan offers a 0.01% per annum discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. This discount is applied to each loan that you have with Unloan. If you have multiple loans (e.g. one investor and one live-in loan), they will each have a discount calculated based on when you settled each loan. Unloan may withdraw this discount at any time.

There are no fees from Unloan. However, there are some mandatory Government costs depending on your state when switching your home loan. For convenience, Unloan adds this amount to the loan balance on settlement.

* Other third-party fees may apply. Government charges may apply. Your other lender may charge an exit fee when refinancing.

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Calculations are not a loan approval. Applications are subject to credit approval, satisfactory security and minimum deposit requirements. Full terms and conditions will be set out in our loan offer, if an offer is made.

^Rates shown are inclusive of a 0.01% p.a. discount off our reference rate. On each anniversary of your loan’s settlement date, you will receive an additional discount of 0.01% per annum, up to a maximum discount of 0.30% per annum. For purchase loans with a Loan to Value Ratio (LVR) between 80.01% - 90% LVR, a lenders mortgage insurance (LMI) premium and higher interest rate apply. In some cases depending on the property’s location or type, LMI may also be required for LVR between 70.01% and 80%.

*Comparison rate is calculated on a $150,000 secured loan over a 25 year term. WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.

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