Help! I’m in ‘mortgage prison’, how soon can I get free?

Hi Nicole, we would really like to refinance to make the savings you wrote about recently. I’m just not sure if we would be approved. Our household income has probably gone up slightly since, but we were refused a refinance with a much cheaper lender in July last year – is it too soon to reapply? Is there a way we can make sure we will be approved? Thanks, Rachel

Rachel, this sounds like a classic case of being in “mortgage prison”, where you are locked in your existing loan because lenders refuse you as a customer, usually due to insufficient income or lower house prices. Thankfully, this prison is slowly being unlocked with each rate cut.

If your mortgage is being held hostage by uncooperative lenders, there are some tricks you can try.Credit: Eamon Gallagher

I’ve written often it’s ludicrous that the rules mean lenders have been assessing that you can’t cover higher repayments, even though you may be close to doing so on your existing, more expensive, loan!

Currently, loan applicants are stress-tested to see if they could cope with 300 basis points of rate rises. That’s huge, especially given interest rates are now widely expected to fall – the on-target inflation reading last week makes a second cut, this month, likely.

In the election campaign, the Coalition alluded to easing the stress test, and it would be an easy, now-safe fix. I support an instant 100-basis-point relaxation, to 200 basis points.

You don’t provide specifics of your situation, Rachel, but I asked data house Mozo to calculate how much you’d need to prove you can afford to repay based on a $500,000 loan with both so-called “serviceability” buffers: 3 and 2 percentage points.

Before 2025’s first cut, based on an average base interest rate of 6.3 per cent, borrowers needed to prove they could afford:

• $985 a month more than the $3314 mortgage repayment with a 300-basis-point buffer.
• $645 a month more than the $3314 mortgage repayment with a 200-basis-point buffer.

After two rate cuts, possibly as soon as May 20, they’d only need to prove they can afford:

• $967 a month more than the $3161 mortgage repayment with a 300-basis-point buffer
• $632 a month more than the $3161 mortgage repayment with a 200-basis-point buffer

Yes, if the government (still sensibly) cuts the stress test to 200 basis points, and there are four more rate cuts this year, as some pundits are expecting, that’s game changing.

Is it too soon to re-apply? Not if you’ve resolved the problem that saw you rejected in the first place.

You’d only need an income buffer of $612 on top of your $2938 required repayment. That’s a total of $3550 versus where we started at $4299. And at a theoretical prevailing interest rate then of 5.05 per cent, you’d be able to borrow $105,000 more for your refinance.

But, ahead of that, perhaps your income is not quite there yet, Rachel. So here are two strategies to free up more money fast – essentially, you can speed up your freedom from mortgage prison yourself.

The first is to go to financial ground in the three months before you apply for a loan, by which I mean: spend as little as you possibly can.

Making fewer discretionary purchases in the months leading up to your application can free up some more income.Credit: Bloomberg

Under what you could call the Netflix test, a lender will trawl through and categorise your every purchase over that time. Make as few as possible – in particular, discretionary, fun ones.

I appreciate tightening the belt is hard, but it’s for a limited period and should be very worth it. In your last application, Rachel, might some financial frittering have hurt you? It’s all about instead showing excess capacity – a spare $500 a month ups your potential loan by another, say, $60,000.

Your second strategy to get a loan over the line this time is a little easier, but you may want to think through the longer term implications. Any credit card limits – even if unused, and you carry a $0 balance – will have significantly cut the amount for which you were approved.

This is because lenders rule out enough money from your salary to clear these limits in three years. It’s another safety thing because it is, of course, possible to run your debt up to this amount the moment a loan is approved.

The calculation of this is usually your card limit times 0.038 (because they assume your card limit costs a monthly 3.8 per cent of your income). That means a $10,000 limit would swallow $380 of your income each month, ruling out its availability for a home loan repayment.

This can wipe five or more times off the amount you can borrow – so, for example, a $10,000 unused credit card limit might decrease your loan by $50,000. Increasing your income capacity is – somewhat – easily fixed with lowered spending and card limits.

And, as rates and maybe the requirement fall, you will progressively need less and less “fat” in your finances. So, is it too soon to reapply? Not if you’ve resolved the problem that saw you rejected in the first place.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook , Twitter, and Instagram.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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