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Why Aussies could be forced to sell their homes

More Aussies are becoming ‘mortgage prisoners’ and locked into higher interest rate home loans, an expert has warned.

People at property auction. Aerial shot of houses in Australia. Mortgage concept.
More Aussies are at risk of becoming stuck in a ‘mortgage prison’, an expert has warned. (Source: Getty)

More Aussies will become ‘mortgage prisoners’, an expert has warned, following a decision to keep a high buffer on home loans.

This week the Australian Prudential Regulation Authority (APRA) decided to stick with its current 3 per cent serviceability buffer on home loans. That means providers will continue to add this amount to their interest rates when assessing whether to approve mortgage applications.

For instance, if you had a $500,000 loan with a 4 per cent interest rate, you would be assessed on whether you could afford repayments at 7 per cent.

The Finance Brokers Association of Australia (FBAA) said keeping the existing buffer meant more Aussies won’t be able to refinance and negotiate a better rate, which could have drastic consequences for some.

“More borrowers are becoming ‘mortgage prisoners’, locked into a situation where they can’t access a better deal because they don’t meet the inflated assessment rate,” FBAA managing director Peter White said.

“Others may be forced into selling their homes because the excessive buffer rate holds them prisoner to their current lender as rates rise.”

The FBAA is calling on APRA to reconsider its decision and argued a 1.5 to 2 per cent buffer would be more appropriate.

Canstar editor-at-large and money expert Effie Zahos said there was a need for APRA to raise the buffer rate when interest rates hit rock bottom during the pandemic.

“The buffer acts in the interest of protecting borrowers from rate hikes. The issue is not around whether or not it is needed, it’s about the roadblock it’s causing for some existing borrowers trying to refinance to a lower rate,” Zahos said.

“Ironically the very regulation designed to protect consumers is working against those borrowers in mortgage prison.”

The buffer applies to both new borrowers and existing borrowers hoping to refinance their home loan.

For prospective borrowers, Canstar research found the move would slash their borrowing power by $21,000. That’s compared to their budget under the previous 2.5 per cent buffer that applied until early October 2021.

The Reserve Bank is widely tipped to raise interest rates again when it meets next week. Westpac has forecast rates to peak at 4.1 per cent, up from its previous prediction of 3.85 per cent.

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