As the RBA continues to increase the cash rate, many Australian borrowers are becoming “mortgage prisoners”, stuck with their current home loan and unable to refinance. If you are a“mortgage prisoner” who wants to separate from your partner what should you do?
What to do if you’re a “mortgage prisoner” who wants to separate from your partner?
September 12, 2022
Lisa Wagner &
SHARE THIS INSIGHT
Many Australians with mortgages are currently experiencing financial pressure with rising interest rates as well as increases in their costs of living. A new term has even been coined to describe homeowners who are trapped in their current mortgage, are unable to switch to a new mortgage and may not be in the best position to sell their home, dubbed a “mortgage prisoner”.
What is a mortgage prisoner?
If you cannot leave your current mortgage because your financial circumstances have changed, you are what is termed a ‘mortgage prisoner’.
Typically, mortgage prisoners in Australia are people who cannot refinance their home loans because they:
Do not meet the new serviceability criteria
Do not have enough equity in their home
Have a bad credit score
Have lower valuations due to property values falling, so their property comes in under value when trying to refinance
This means that they do not fulfil the stringent criteria to refinance their home loan. Mortgage prisoners are stuck paying a higher interest rate on their home loans and are locked out of switching to a better suited and possibly cheaper home loan due to these factors.
If you are a “mortgage prisoner” going through a separation or considering separating from your partner, you are probably feeling overwhelmed from the additional complexities this places on an already very difficult situation.
Here are five (5) tips to assist you when faced with such a predicament:
Consider long term goals
Planning ahead really involves two stages namely:
Creating a “forever” (or “almost forever”) plan and then looking how to
Develop a short-term plan to support your long term objectives.
Often when you are working on this plan you may start to confuse short term and long-term considerations. Two of the most common mistakes that some people make at this point is to look straight away at their work options and also at housing. It might be the right time to think about these things, but it is not necessarily the right time to act on them just yet. These issues are important, but are often long term considerations. Making decisions right now about things that can have long term consequences can result in long term problems.
If you have not already done so by now you should get specialist family law advice. It may even be wise to consider getting some advice from a financial planner or financial advisor, especially if you have become rusty in managing your own financial affairs independently. Each of these specialists can give you clear advice and show you reliable strategies to help you achieve short-term and long-term independent success.
Create a household budget
Creating a family budget and delving into household costs is a useful exercise to go through when facing a separation regardless of your financial situation. By doing a thorough household budget (right down to the nitty gritty) it will help you understand the basic monthly costs that you will have and what sacrifices you may need to make to “trim the fat”. Whilst this can be a downright frightening process to undertake it is vital for providing you with a clear understanding of your financial needs. When applying this to your “mortgage prison” situation, the aim is to create a budget and stick to it, lowering your household costs where possible and cutting down on unnecessary expenses to improve your borrowing power. As part of this process consider reducing your credit card limits.
Understand what a bad credit rating is
A bad credit rating, or bad credit score is caused by negative data on your credit report. There is a range of negative data, some include missing your monthly repayments on your home loans, credit cards and personal loans, or defaulting on a loan, being bankrupt or having court actions listed against you. The impact of a bad credit rating can impact access to home loans as well as may mean you could get rejected for a rental property.
The aim is that whatever possible avoid getting a bad credit rating by:
Paying bills and loans on time
Keeping low balances on credit cards; and
Checking your credit report for errors
If you want to find out more about your current credit score, there are three credit reporting agencies in Australia:
A free Illion report and score can be obtained from: illion.com.au
A free Experian report and score can be obtained from: Experian
(NB: The above provide free personal credit reports. You have to pay for company reports).
For some people, their credit rating may be high but that is because there is too little credit information available. This can also cause an issue, especially if their partner has taken control of the financials when they were together and now that a separation is in play there is not enough information or a high-enough salary for them to even get their own credit card, let alone refinance. Seek financial advice if you feel this may apply to you.
Consider living in the same home when separated i.e., living separately under one roof
Seeking advice and engaging the right family law specialist from the outset can help you make the important decisions that will impact your and your family’s future lifestyle, both on a personal and financial level. Obtaining the right advice and representation for your situation will help to enable a separation and/or divorce whereby your financial position is maximised, to give you and your family the best possible start in your new lives.
If you are considering a separation or divorce or have a Family Law enquiry, please contact us on (02) 9437 0010 or email at firstname.lastname@example.org to discuss your matter with no obligation, in complete confidence.
At Doolan Wagner Family Lawyers we specialise in complex family law matters and are conveniently located in St Leonards, on Sydney’s North Shore. We have a team of accredited and experienced family lawyers available to help guide you through the emotional and financial challenges of separation and divorce.
Doolan Wagner Family Lawyers – Moving on with Confidence
About the Author:
Lisa Wagner is Managing Director and Principal of Doolan Wagner Family Lawyers. Lisa is an Accredited Family Law specialist holding honours degrees in economics and law. She is also a Collaboratively trained Family Lawyer, a Family Dispute Resolution Practitioner, and a Parenting Coordinator. Lisa has close to 30 years’ experience as a specialist family lawyer, experienced litigator and skilful negotiator in all family law matters; working for the majority of that time in Sydney’s CBD as well as on Sydney’s lower North Shore and Northern Beaches.
These posts are only intended as an overview or comment on current issues that may interest you and are not legal advice. If there are any matters that you would like us to advise you on, then please contact us.