Mortgage prisoners can still get a better deal amid intense competition for home loans

Trapped in a big mortgage, some borrowers will be excluded from a price war among the big banks – but there are still ways to get a better deal.

Intense competition in the home loan market is driving lenders to offer cut-price deals and generous cashbacks to entice new customers. But for a certain cohort there are few options, as rate rises and a weakening housing market make for a much less attractive borrower.

These are the “mortgage prisoners”, borrowers who may be rolling off ultra-low fixed rates and onto much higher variable loans and fear they are now stuck paying sky-high interest rates with no chance of getting a better deal.

And as the official cash rate pushes higher – three of the big four banks now expect a peak of 4.1 per cent in the coming months – the number of mortgage prisoners will soon rack up.

What’s more, the prudential regulator’s move this week to keep a 3 per cent loan serviceability buffer for mortgages is a further hit to this cohort.

According to Finance Brokers Association of Australia managing director Peter White, APRA’s decision means more borrowers are being locked into a situation where they can’t access a better deal because they don’t meet the inflated assessment rate.

“A 3 per cent buffer was appropriate in the past because interest rates were at an all-time low and were always going to rise significantly, and this protected both the banks and the borrowers, but we can’t live in the past and a buffer of 1.5 to 2 per cent is far more appropriate today and in the near future,” he argues.

Escape route

But there are still some options out there for those chained to their lender, says RateCity head of research Sally Tindall.

For those who can’t move to another bank, it’s at least worth trying to negotiate a lower rate with an existing lender.

“Check what rate they’re offering new customers and if it’s low, then you’ve got your first piece of ammunition to pick up the phone and ask for a rate cut.

“They don’t know the value of your property because they’re not going to issue another valuation. They might be able to do desktop valuation … or they might have a gut feeling that you’re in mortgage prison, but they won’t know that for certain.”

Indeed, many more borrowers are successfully decoupling from the so-called loyalty tax, according to Adam Grocke, the chief executive of repricing and refinancing platform Sherlok, which uses AI to help brokers get clients a better deal.

“Most lenders are offering significantly larger discounts to existing customers in the last three months compared to the same time last year. In some cases this is 0.4 per cent higher on average than this time last year,” he said.

“We’ve recently seen rates reduced to 4.88 per cent with second tier lenders and the big four banks are coming back in the low 5s and occasionally we see a 4.99 per cent from them.”

The fintech has also seen a shift where lenders are offering discounts on basic home loan products when they haven’t repriced these products previously. ANZ has led the charge with this, Mr Grocke said.

Even those seeing their loan-to-value ratio tip over the crucial 80 per cent mark have a chance to get out of a tight spot.

“If your equity has dropped below 20 per cent and you’re on an uncompetitive rate, it’s still worth making a few inquiries and checking to see whether refinancing is a viable option for you,” Ms Tindall said.

This is especially true for those whose equity is close to that 20 per cent mark.

“For someone who owes $500,000 on their house and the property is worth $600,000, their LVR would be sitting at 83 per cent, so they would have 17 per cent equity. LMI on that would be $4659, and you might decide it would be worth paying that.”

With cashback offers in the thousands of dollars, it’s worth at least doing some calculations to see if that cash in hand can cover the costs, including lenders mortgage insurance, of switching to get a better deal.

Indeed, some of the cashback offers in the market, and there are quite a few around the $4000 or $5000 mark, would cover the cost of paying LMI. But if the cost of LMI outweighs or negates the benefits you would get from switching, then you really need to take stock and consider whether that’s the right path to take.

It’s also worth keeping in mind that not all cashback deals are as good as they look. As the home loan battle heats up, dozens of lenders are desperately trying to lure customers with cashbacks of $2000-plus, with one in the market offering $10,000 to switch. But some of these come with higher interest rates that end up costing the borrower a lot more over the long term.

One more thing to keep in mind is that refinancing too often can also make a borrower look less appealing to lenders.

“If a bank sees that a customer refinances every six months, they’ll say to themselves, ‘Oh, they’ll only stay with us that long too. Do we really want that?’” Mr Grocke said.

But in this environment borrowers should still be doing a health check on loans every few months to at least seek a lower rate from their current lender.

Originally published as Mortgage prisoners can still get a better deal amid intense competition for home loans