Mortgage prison readies gruel for thousands of Australians


Tuesday’s 0.25% interest rate hike from the Reserve Bank of Australia (RBA) has reduced mortgage borrowing capacity by more than one-third.

The minutes accompanying Tuesday’s decision also flagged several more rate rises in the period ahead, which will shrink borrowing capacity even further.

Mortgage broker Simon O’Kelly warned that rising interest rates could trap recent borrowers in ‘mortgage prison’, with the reduced borrowing capacity preventing them from refinancing onto a cheaper rate.

“After today the borrowing capacity will drop again”, O’Kelly said, the majority of whose clients include first home buyers and refinancers.


“The number of people who can take a loan has dropped”.

“There are people who could get a loan 12 months ago who, unless they’ve had a decent wage rise, may not be able to get a loan now”, O’Kelly warned.

The situation is exacerbated by the heavy house price falls experienced in Sydney, Brisbane and Melbourne, which will have pushed many recent purchasers into negative equity.

Peak to trough house price falls

Basically, the combination of soaring mortgage rates and falling house prices (negative equity) will impede borrowers’ ability to refinance because they will no longer meet borrower stress tests.

In turn, these borrowers will become trapped in expensive mortgages they are struggling to repay.

Falling home values will also push many loan-to-valuation ratios above the 80% threshold at which new borrowers must usually pay mortgage insurance.


The situation will be especially worrying for the thousands of first home buyers that purchased at the peak at ultra-cheap fixed rates of around 2%:

First home buyer fixed rate lending

As the RBA continues to tighten, many of these first home buyers face the painful prospect of being plunged into negative equity at the same time as they reset to rates of 6% or more and are unable to refinance to a better deal.


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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.