What’s the escape plan for ‘mortgage prisoners’?

Barrenjoey analyst Jonathan Mott last month cited a survey of mortgage brokers that found brokers thought 24 per cent of their customers would end up in “mortgage prison”. Every Reserve Bank rate rise – including last week’s – pushes more people into this group.

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While it’s clearly bad news for customers who are trapped, views differ on how this affects the banks. Some analysts think the fact people can’t switch limits competition, thereby protecting profitability.

But the reality appears to be a bit more complex. For one, banks insist they are still giving home loan customers competitive rates, even if the borrower can’t make a realistic threat to leave. You may or may not believe that, but there is little doubt that stiff competition in home loans is crunching the banks’ margins.

Second, Mott has argued the mortgage prisoner situation could feed into higher levels of stress in the banks’ home loan portfolios. While banks can still help struggling customers in other ways – such as by extending loan terms, or putting people onto interest-only payments – Mott has predicted an “inevitable” rise in impaired home loans that will be become clearer by the end of this year.

A UBS survey of 805 home loan customers last week also pointed to the cost-of-living crunch on borrowers, as it suggested more people were eating into their savings buffers.

Despite these risks, however, relief from regulators appears unlikely: they want to avoid doing anything that could spur riskier lending while interest rates are still on the rise.

Bankers had been hopeful the Australian Prudential Regulation Authority might loosen the rules by now – after all, the serviceability buffer was only increased to its current level of 3 per cent in the late 2021 house price boom.

But APRA chairman John Lonsdale has scotched these hopes, telling Senate estimates this month that 3 percentage points was “the right number”, given the uncertainty about the economic outlook.

He also said the rate of people refinancing with another lender was the highest it had been in 20 years – a sign of competition.

In some cases, he said banks could make exceptions to the rule and allow a customer to refinance even if they didn’t meet all the serviceability requirements. Lenders, including Westpac, have recently made changes along these lines. But these “policy exceptions” are only being used for about 2 per cent to 3 per cent of loans: not enough to help all mortgage prisoners.

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And it’s pretty clear that Lonsdale wants to see exceptions remain just that: APRA wrote to banks on Friday reminding them to be prudent in moves designed to help mortgage prisoners refinance.

Just in case the banks had any doubts, Lonsdale’s letter warned them that any bank writing a large number of loans to borrowers who failed serviceability tests would face tougher scrutiny.

It all suggests the mortgage prisoner problem will be with us for a while yet.

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