Being in the mortgage industry, I know homeowners are constantly advised to do a home loan health check. This is best practice, especially if you are coming out of your fixed rate period, struggling to meet repayments, or going through some life changes, especially events affecting your finances.

Most of the time, the practical step after a home loan health check is refinancing. If not refinancing, there are other home loan solutions, and this depends on the unique circumstances that the homeowner is in.

When it comes to refinancing, what is being left out of the discussion is that some scenarios need some attention. Many home loan borrowers struggle to refinance. Why? Keep reading to learn more.

Reason #1: Serviceability Issue

When obtaining a home loan, the loan amount a bank or lender grants hinges on various factors. Alongside your loan-to-value ratio (LVR) and credit score, you’ll likely come across the term “serviceability.” It is the bank’s way of evaluating your capacity to manage a home loan successfully. This involves scrutinising your income and expenditures and other considerations to ascertain the feasible amount you could comfortably allocate for repayments.

Now, there’s another term involved, and it’s called “serviceability buffers”. They are an additional precautionary measure banks use when assessing your ability to repay your mortgage. These buffers are designed to provide a safety margin that accounts for potential future interest rate increases or changes in your financial circumstances. Simply put, they act as a cushion to ensure you can still afford your mortgage repayments even if interest rates increase or unexpected financial challenges arise.

Serviceability buffers used by banks, being at a higher rate now than 3 or 5 years ago, are a major serviceability issue at the moment. There are calls for banks to slash their serviceability buffers, and in fact, CBA and Westpac, two of the Big Fours, were quick to adhere as of June this year.

Reason #2: Valuation Issues

Remember, the value of your property can go up and down. It can change over time because of property market trends in your location, economic conditions, interest rates, home features added or altered, government policies in your state, infrastructure and development near you, and many more. These shifts play a role when you’re considering refinancing your mortgage. Why?

This is because when you refinance, the bank will check if your property’s value is sufficient to rationalise the “new home loan”. They want to make sure that your home can function as a security or collateral in case you defer on your home loan repayments.

If your property’s value has diminished and you still owe a lot in your current mortgage, then you can be denied to refinance.

Reason #3: Soaring Interest Rates

Interest rates play a pivotal role in refinancing, and their trajectory is influenced by the cash rate set by the RBA. As the cash rate undergoes successive hikes, interest rates tend to follow suit, resulting in an upward trend that can significantly impact borrowing costs. This presents a challenge for those considering mortgage refinancing.

The pressure of rising interest rates along with higher living costs have made home loan repayments even more challenging to meet, and so, homeowners are unable to gain enough equity in their homes. This adds to the challenge of refinancing, and normally if they are allowed to, and they are borrowing more than 80% of their home’s value, Lenders Mortgage Insurance (LMI) will be required, which will burden the borrower even more.

Don’t get stuck in Mortgage Prison

In light of the three challenges that I’ve mentioned, homeowners must navigate mortgage refinancing with prudence and strategic insight:

• Leverage Broker Expertise: Collaborate with mortgage brokers with unparalleled access to lenders and rates. Their in-depth knowledge of the property market can steer homeowners toward viable refinancing pathways.
• Monitor Market Trends: Vigilantly track property trends. Rising property values might create an opportunity to wait until LVRs fall below the critical threshold.
• Financial Vigilance: Conduct a comprehensive financial assessment. Responsible budgeting, minimising non-essential expenditures, and optimising costs can alleviate the financial strain while exploring refinancing options. It’s important to be aware of your credit score and actively work towards improving it. This can be included in your overall financial monitoring.
• Embrace Resilience: Despite challenges, homeowners must remain resilient. Don’t lose hope. Property experts are saying that we are almost at the end of the tunnel – the cash rate hikes are expected to end soon, and we’ll finally see rates stabilise. Also, you do not have to thread through this challenging period by yourself. Mortgage brokers can help you find a solution if you are struggling to refinance – they know the market very well, and they are there to work in your best interest.

I encourage you to take the first step towards knowing more about how to better your financial scenario and avoid being trapped in mortgage prison. Explore how Lendstreet can help you chart your financial course, especially if you’re coming out of your fixed-rate term.

You can also book a one-on-one consultation with me through this link.