First published 13 Nov 2026, 5:00am
Canstar’s Sally Tindall said a new type of mortgage prisoner has emerged.
We’re always telling borrowers to refinance their home loans for a better deal.
Rates are rising and your bank is slugging you? Shop around, there will be someone out there offering a better deal!
But what happens if a borrower is unable to refinance? What happens if they are stuck in … (cue foreboding music) … mortgage prison?
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A growing number of Aussies are finding themselves banged up in a home loan hellhole. Their repayments are rising, their property value is falling and their bank has them on a much worse deal than it is offering new customers. Sadly, there’s little they can do about it.
It’s like telling someone in Long Bay that if they don’t like prison food, they should just head into town to find a restaurant.
Rising interest rates are trapping more Aussies in mortgage prison.
Borrowers may find themselves in mortgage prison when there are better deals out there, but they no longer pass the eligibility tests for those other loans.
This became quite common when rates rose astronomically in 2022 and 2023, because many borrowers couldn’t pass APRA’s mandatory 3 per cent serviceability buffer on the new loan product.
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Forget the fact that the refinance would see their repayments lowered. That’s right, they were deemed unable to afford to pay less than they were already paying.
Canstar data insights director Sally Tindall said people who bought when rates were at record lows and borrowed at, or near, capacity were especially vulnerable at this time.
“Borrowers were trapped in mortgage prison because, when they went to refinance, they couldn’t pass their new bank’s serviceability test because interest rates had risen so significantly in a short space of time,” Ms Tindall said.
“Someone who bought five years ago, borrowing at an average rate of 2.59 per cent, was assessed at a seemingly prudent 5.59 per cent.
“However, this three-percentage point stress test has been no match for the 4.75 per cent of rate hikes we’ve seen (since October 2021, when APRA upped the buffer from 2.5 per cent to 3 per cent).”
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Loans processed without a 3 per cent stress buffer are on the rise. Source: APRA.
In 2023, major banks including Westpac, NAB and ANZ announced they would assess some loan applications at a serviceability buffer of 1 or 2 per cent instead, as long as the borrower passed other key metrics that proved they were sound and stable.
But with rates now at their highest level since 2008, Ms Tindall said lower buffers can still prove difficult.
“Once this latest hike filters through, an owner-occupier taking out a new variable rate loan will be looking at an average rate of 6.73 per cent. This means, when the bank applies the standard 3 percentage point buffer they’ll be stress testing you at 9.73 per cent,” she said. “Even with a 1 percentage point buffer applied, that’s still a stress test of 7.73 per cent.”
Ms Tindall said the most recent rate hike cycle has seen a new type of mortgage prisoner emerge.
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“Newer borrowers are increasingly finding they’re in mortgage prison because their equity is on the slide.
Tindall said falling equity was making it harder for borrowers to refinance.
“As a general rule, refinancers need at least 20 per cent equity in their mortgage to refinance, because if they aren’t over this all important threshold, their new lender will ask them to pay lenders mortgage insurance, (which) can often wipe out the financial benefit of refinancing.
“The problem is, a borrower’s equity is measured against current property values, and these prices are on the slide in most capital cities. This is partly rate driven, but also comes on the back of the federal government’s property tax changes.
“Some borrowers, who might have previously owned 20 per cent of their property, might find they own less now based on current property prices. Others who bought with wafer thin deposits will find it’s taking a lot longer than they expected to get to over this threshold.”
Ms Tindall said some options for borrowers in mortgage prison would be to attempt to negotiate a better deal with their current bank (a tough ask without much leverage if you can’t actually leave); reviewing finances to improve borrowing capacity, by ditching unused credit cards or reducing limits, cutting household spending and paying down existing debts; and finally to consider paying lenders mortgage insurance, if the deal you are refinancing to can still put you ahead of your current position.
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