Home owners trapped in mortgage as 'refi' doors close tight!

The last 12 months in the mortgage industry has seen a large number of restrictive actions by regulators in order to slow an overheated property market especially in Sydney & Melbourne.

In a free market democratic economy, the unenviable task of calling the shots and enforcing restrictive measure falls on ASIC and secondarily, APRA.

The goal is to slow a growing property market without causing the market to tank and spiral into an out-of-control decline, causing a property crash - of which we have seen in several foreign markets. Careful measures must be taken to reign in lending policy and restrict the borrowing capacity of borrowers. It's important to restrict the right borrowers and to try not to severely impact others. Possibly an impossible task? The main focus has been to restrict investor borrowing, foreign investors and interest only mortgages.

It's quite easy to understand why these measures have been enforced, but the question needs to be asked...

"Are these changes too little, too late?"

Some might say... we're headed for a property crash that's inevitable. Others believe a correction is long overdue and much needed to re-calibrate the market. As we have never ever seen times like this in history, no one quite knows what's in store. All the industry commentators and thought leaders can do is take a calculated guess.

So, who is set to suffer from the regulatory changes that have recently been enforced in rapid succession? Should these consequences been foreseen and acted upon many years prior in order to avoid possible harsh consequences?

Many leading mortgage brokers are dis-heartened and concerned by a sharp increase of clients who do not pass serviceability tests and are being declined for requests to refinance their existing mortgages. The problem is, these clients would have received a clear approval any time before the last 6 months following a series of mortgage calculator changes massively restricting the borrowing power for mortgagees.

So what are they to do?

The obvious answer is to keep up their mortgage repayments, right? But the not-so-obvious issue is that many of these clients are on 'old money' mortgages and in many cases are trapped within non-competitive interest rates and repayments Many of these clients who have not taken up an offer to refinance recently are trapped on interest rates as much as two percent higher than the average market rate. This means some clients are paying 6% interest rates or more. Worse than that, many of these clients have or will have their interest only portions of their mortgage retracted. The total effect of these restrictions could force many into mortgage stress or hardship. These home owners are being penalised and no longer have the option to refinance to a more competitive lender as some lenders are reducing their new client mortgage rates, fees and charges to increase their market share.

All it will take is for as little as, a pay cut, loss of income or an investment property vacancy to push these clients over the edge. Some are already struggling to make ends meet. Their only option may be to instigate a 'forced property sale'. A sharp increase of properties onto the sales arena could severely impact the property market stability. This situation will only be worsened if the suggested 2% interest rate increases are implemented - as quickly as the next couple of years.

It's suggested that much of the property growth in Australia has been caused by foreign investment, however, it's not know just how much this is responsible. With foreign investor lending restrictions taking effect over the last 6 months, many commentators are suggesting the real effects are about to be seen over the next year or two. The are many nervous eyes watching to see how many off-the-plan purchase contract fail as foreign investors fail to secure finance options and walk away from their obligations to purchase.

With a large number of foreign investors owning multiple property, following tightening policy for borrowers in Australia, many of these property owners are also trapped in mortgages with no exit and spiraling mortgage repayments. How many will be forced to sell?

John J Maxwell, senior mortgage and finance consultant, Cocalex Consulting

If you have any questions or contributions relating to this article, please take the time to comment below and share your thoughts or opinions for the benefit of others reading this. No doubt this topic commands interaction, innovation and collaboration. The more answers that are delivered, the more questions that will arise. If you have any personal questions or queries, please feel free to contact me on 0434 455 225 or email: [email protected]

About the author:

John Maxwell is founder and Senior Finance & Business Strategist at Cocalex Consulting. John has over 17 years' experience in the financial services sector, and has owned and managed 9 mortgage franchises and has developed a background across the holistic financial services realm. He has particular focus and passion for: Leadership Training and Development, Franchise Development and Business Networking.