Mortgage Lending Criteria Tightened Leaving Many Borrowers In A Pickle

Post by Sharat on September 21, 2018 · Under loans · Comments Off on Mortgage Lending Criteria Tightened Leaving Many Borrowers In A Pickle 

As variable home loan rate changes have been made, it should come as no surprise that many Australians are rethinking their existing mortgage. Thousands of property owners in the country are set to become so called “mortgage prisoners”. This is when a homeowner cannot obtain refinancing because they no longer meet their mortgage lender’s lending requirement even if they have made every repayment on time.

Tighter standards are necessary

There is good reason for the introduction of stricter lending criteria as household debt rose and income growth stalled against a backdrop of low interest rates. The follow-on effect is that almost a third of owner occupier mortgage holders are now experiencing financial stress and many no longer meet the lending requirement and have become mortgage prisoners.  The worst affected are those people that need a new loan the most. Borrowers who require cheap mortgage rates to stay solvent are the most likely to become mortgage prisoners.

New approach

Previously lenders adopted a ‘one size fits all’ approach to determining the ability of a loan applicant to repay a home loan. This meant that lenders used a modest estimate of expenses regardless of the potential borrower’s income which had the effect of inflating the amount that was lent and the lenders mortgage books. The criteria has tightened and income and current expenditure is now considered. This means a borrower who no longer meets the new criteria is stuck with their current loan and will need to pay whatever rate their lender sets, hence the term prisoner.

Lots of ways to solve the problem

If you are someone who finds yourself in this situation you should look at alternatives to improving your uncompetitive rate. This could mean contacting your lender and urging them to lower your rate, or speak to a non-bank lender who may consider lending you money. There are lots of ways to cut the cost of your mortgage by thousands of dollars. Nearly 70 per cent of borrowers who bargained with their lender were able to cut their interest rates by 50 basis points and save thousands in the process.

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