There is a specific kind of stuck that a lot of Australian borrowers are in right now. You have made every repayment on time for years. You can afford the loan. And when you apply to move to a cheaper lender, you are declined for serviceability.
It sounds absurd, and the mechanism behind it is straightforward once you see it.
Why paying a loan does not prove you can afford it
A new lender does not assess whether you can make your current repayments. It assesses whether you could make the new repayments at roughly 3 percentage points above the new rate.
So a borrower comfortably paying 6.5 percent today gets assessed on whether they could pay around 8.5 percent on the new loan. Passing the real world test does not get you through the hypothetical one.
Layer on the other things that have shifted, and the gap widens: living expense benchmarks are higher than when you first borrowed, your credit card limits are counted in full whether you use them or not, and if you have children they cost more in a lender's assumptions than they did.
The result is a borrower with a perfect repayment history who cannot move. That is a mortgage prisoner, and their lender has very little reason to price competitively for them.
Route one: do not refinance at all, just ask
Before anything else, ring your current lender's retention team and ask them to reprice your loan.
This works more often than people expect, and it has a structural advantage over everything else on this page: no application, no credit enquiry, no serviceability assessment. You are not taking out new credit, so none of the tests apply. The thing blocking you elsewhere is simply not in play.
How to do it properly:
- Ask for retention or the discharge team, not the general line
- Have a real competing rate to quote, with the lender name
- Ask what rate they can offer to keep the loan, rather than complaining generally
- If the first answer is no, ask what would need to change
Lenders discount for retention because losing a loan costs them far more than a rate reduction does. Plenty of people never ask, which is exactly why the loyalty tax works.
Route two: the reduced buffer for like-for-like refinances
Some lenders apply a lower serviceability buffer, around 1 percent instead of 3, where you are refinancing an existing loan without increasing the amount or materially extending the term.
The logic is reasonable. You have been making these repayments for years, and the loan is not getting bigger, so a full stress test on an unchanged obligation is arguably the wrong test.
The conditions are typically strict:
- No cash out and no increase in the loan amount
- A clean repayment history, usually 12 months or more
- No material worsening of your position
- The new repayment must be lower than the current one
It is not offered by every lender and it is not always advertised. This is one of the specific situations where knowing which lender does what is worth more than shopping on rate.
Route three: the lenders with softer settings
Serviceability is not a single formula. Across the ten lenders NIK Finance models in detail, the settings vary widely enough to change the answer.
Buffers on our modelled panel run from around 1.5 to 2 percent at Bluestone, the lowest, up to a standard 3 percent at most majors. Debt-to-income treatment ranges from a hard cap under 6x for some lending at Qudos, to no hard cap at all at Firstmac and Bluestone.
A borrower who fails at a 3 percent buffer with a 7x DTI cap may pass at a lender applying 1.5 percent with no hard cap. The trade is usually a higher rate, so it is only worth doing if the rate you move to is still better than the one you are trapped on, or if the move unlocks something else you need.
Sometimes it will not be worth it, and that is a legitimate answer.
Route four: reduce the obstacle rather than route around it
Some of what is blocking you is fixable in weeks.
Credit card limits. Assessed in full, regardless of balance. Reducing a $30,000 limit to $5,000 removes a large assessed commitment and costs nothing. This alone moves marginal applications.
Small loans. Clearing a car loan or personal loan removes the entire monthly commitment from your assessment. For serviceability, this frequently does more than the same amount applied to your loan balance.
Buy now pay later. Close the accounts you are not using. They are counted as commitments at most lenders now.
LVR. If you are just above 80 percent, getting under it removes the LMI problem, which is often the real blocker rather than serviceability. A revaluation may do it on its own if your area has moved.
When the honest answer is that you are stuck
If your income has genuinely fallen, or your LVR has risen because the property lost value, refinancing may not be available at any lender right now. Applying anyway produces declines and credit enquiries, which leaves you slightly worse off.
In that case the useful moves are repricing with your current lender, reducing the balance where you can, and revisiting it in six to twelve months. If the repayments themselves are becoming unaffordable, that is a different problem with different answers, covered in struggling with your mortgage repayments.
A broker who takes an application they know will be declined is not helping you.
Find out which group you are in first
The difference between a mortgage prisoner and someone who simply has not asked the right lender is not obvious from the outside. It is entirely knowable from the inside.
Your Kreddi Score assesses your position against real lender serviceability policy and shows which lenders would consider you today, before any application and with no impact on your credit file. If the answer is that nothing better exists right now, you will get that answer too.
Frequently Asked Questions
What is a mortgage prisoner in Australia? A borrower who can afford their existing repayments but cannot pass a new lender's serviceability assessment, usually because the 3 percent buffer applied to a new loan makes them look unaffordable on paper. They are stuck with their current lender and its pricing.
Can I refinance if I fail the serviceability test? Possibly. Some lenders apply a reduced buffer of around 1 percent for like-for-like refinances where you are not increasing the loan amount, on the basis that you have already demonstrated you can make the repayments. Not every lender offers it and the criteria are strict.
What is a like-for-like refinance? Switching your loan to a new lender without increasing the amount borrowed or extending the term materially. Because your position does not worsen, some lenders assess it under a reduced serviceability buffer rather than the standard 3 percentage points.
Can I get a better rate without refinancing? Yes, and it is the first thing to try. Ask your current lender's retention team to reprice your loan. It requires no application, no credit enquiry and no serviceability assessment, because you are not taking out new credit. Lenders discount rather than lose loans.
Does a high LVR stop me refinancing? It narrows your options considerably. Above 80 percent LVR you face lenders mortgage insurance again, which is not transferable between lenders, so you would pay it twice. If your property value has fallen, refinancing may not be viable until the balance reduces.
Find Out Whether You Are Actually Stuck
Most people who believe they cannot refinance have never been assessed against more than one or two lenders. Reduced buffers for like-for-like refinances and softer serviceability settings at some lenders move a meaningful number of these cases.
Your Kreddi Score checks your position against real lender serviceability policy and tells you which lenders would consider you today, with no application and no credit enquiry. If nothing better exists right now, you will know that in 15 minutes rather than after three declines.
Serviceability settings and reduced buffer policies reflect the lender policies modelled in the NIK Finance scoring engine, vary between lenders and change without notice. This is general information, not personal advice. NIK Finance Pty Ltd is a Credit Representative (567387) of Finsure Finance & Insurance Pty Ltd, Australian Credit Licence 384704.