New homebuyers who bought at the height of the housing market with low deposits may find it more difficult to switch banks in their search for cheaper rates, despite the mortgage refinancing boom underway in the market.
With interest rates rising, experts have warned that a large group of borrowers will struggle to meet the criteria needed to switch between lenders.
The main pain point for some mortgage holders, according to brokers and analysts at investment firm Jarden, is that they will no longer pass the lender stress tests for new borrowers. Falling home prices are also expected to push loan-to-value ratios (LVR) above the 80 percent threshold at which new borrowers will have to pay for mortgage insurance.
Garden has estimated that 10 to 15 percent of all outstanding home loans could become “mortgage prisoners” — those who have difficulty refinancing due to high interest rates.attributed to him:Scientific
Research by Jarden’s chief economist Carlos Cacho estimates there are hundreds of thousands of “mortgage prisoners,” adding that the trend could benefit banks by discouraging competition for housing loans.
Cacho estimated that 10 to 15 percent of outstanding home loans could be stuck with the lenders involved, with first home buyers who bought near peak home prices particularly exposed.
“There is likely to be between $200 billion and $300 billion of mortgages that will struggle to refinance,” Casho said.
“Realistically, most of the people who will run into difficulties will be people who created their loans in the last two years. If you got a loan five years ago, you’ll probably be fine.”
The “mortgage prisoner” issue arises because when a customer refinances, the bank that issued the new loan must assess the borrower’s ability to service interest rates three percentage points higher than today’s rates. This means that customers seeking to switch should be able to take payments at rates of around 7.5 percent and 8 percent – while the same borrowers were evaluated last year on their ability to handle rates ranging from 5 percent to 5.5 percent.
Falling home prices can also make it more difficult for people with less equity in their homes to turn to banks. For example, if a mortgage loan-to-appraisal ratio rises above 80 percent as a result of a housing correction, a homeowner seeking refinancing may be required to obtain mortgage insurance by the new lender, at a cost of thousands of dollars.
Originally published at Melbourne News Vine
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