When you take out a mortgage over 30 years, it's likely you'll experience some financial ups and downs - and see better home loan deals - along the way.
Fortunately, there are many contingencies, including the prospect of refinancing your home loan to a lower interest rate. But for some, this option may be taken out of their hands, leaving them with no choice but to stick with their current home loan. Such borrowers are often referred to as 'mortgage prisoners'.
What is a mortgage prison?
'Mortgage prison' is a situation where a borrower is unable to switch to a better home loan because they are no longer able to meet the lending criteria for taking out a new loan.
This can be because of a number - or combination - of circumstances, including:
- The serviceability buffer ruling them out as a prospective borrower as interest rates increase
- Increased HEM calculation based on higher living costs
- Interest rate rises and/or cost-of-living increases affecting borrowing power
- Drop in credit rating since last loan assessment
- A lower home valuation from the new prospective lender affecting equity
See also: Home Equity Calculator
The types of mortgage prisoner
Higher serviceability
The major hurdle for many refinance applicants in Australia is that they no longer meet loan serviceability requirements.
In simple terms, home loan serviceability is a lender's assessment of your ability to repay a home loan, based on your income, expenses, and existing debts, with a mandatory buffer applied.
The so-called serviceability buffer is a prescribed safety net lenders must apply in assessing home loan applications. The buffer is set and reviewed by the banking regulator and, as at November 2025, stands at 3%. In simple terms, this means, when you apply for a home loan of 6%, the lender must assess your application as though the rate is 9%.
This buffer is intended as a cushion should interest rates rise or a borrower's financial circumstances change down the track.
Understandably, this can see some aspiring home loan refinancers struggle to get their applications over the line if interest rates, or their circumstances, have changed.
In some cases, lenders may apply a lower serviceability buffer in so-called 'like-for-like' refinance applications for certain eligible borrowers. Generally, these borrowers must have a good track record and higher home equity.
Some lenders may be more willing to relax the serviceability buffer than others so it pays to check individual lender policies.
Borrowing power has changed
There are many reasons borrowing capacity can change. Some can be outside the borrower's control such as inflation driving higher cost of living and rising interest rates.
Other reasons can be the addition of children, new debts, or adjusted household income. Any change in circumstances can see refinance applications rejected even though the borrower may be managing to service their current home loan.
Insufficient credit rating
Another type of mortgage prisoner is one trapped by their own credit report.
If a borrower's credit rating has slipped in the time since their last home loan application, they may find themselves unable to switch to another - or a better - home loan product.
See also: Credit Score Calculator
As well, some home lenders may reserve their best refinancing rates for those with scrupulous credit records, meaning the applicant won't get access to the best interest rate available. This may negate the benefit of switching loans in the first place.
Falling property price, rising loan-to-value ratio
Another less common form of mortgage prison in Australia is brought about by falling property values.
This applies when borrowers who took out a loan at a particular loan-to-value ratio (LVR) see that ratio rise.
This can be due to wider property market conditions, a change in factors affecting the individual property's value, or an unfavourable property valuation from the new prospective lender.
The best home loan interest rates are generally reserved for LVRs below 80%. If a refinancer's LVR rises above that benchmark through a lower valuation, it's unlikely the borrower will be offered the lender's best interest rate.
Again, this can negate any benefit in switching loans, leaving the borrower with little choice but to persist with their current home loan.
Ways to avoid becoming a mortgage prisoner
There are a number of steps you can take now as a mortgage holder to avoid feeling like you may become trapped with your home loan down the track.
1. Make extra repayments
This is a simple way to reduce your loan amount, boost equity, and put you in the best position should you wish to refinance your home loan down the track.
A borrower choosing to make extra repayments will also be looked upon favourably by a new lender, giving you a good chance of being offered a more attractive interest rate.
See also: Extra & Lump Sum Payment Calculator
2. Manage debt-to-income ratios
Keep other debts at a minimum. That includes car loans, credit cards, store cards, buy-now-pay-later debts, even loans for investment purposes.
Often, mortgage applicants will make a concerted effort to reduce these debts when applying for a home loan. Letting the guard down once you have a mortgage can be the bigger issue.
Major lenders have a debt-to-income ratio policy of total debt falling below six-times the annual income of applicants. Perhaps you met the benchmark when you took out your last home loan but no longer meet the requirement.
The same fixes apply: reduce credit card balances, close unused credit cards, pay off car loans, consider a lower-cost vehicle, put a halt on investment spending where appropriate.
See also: Do HECS-HELP debts affect your home loan borrowing power?
3. Refinance early to get ahead of the game
It can be a wise move to get in early if you're considering refinancing your home loan. This can particularly be the case in a climate where home loan interest rates are rising.
In the years following the pandemic, Australia's cash rate rose from 0.1% to 4.35% over three years. Although few could have foreseen the steep hike in home loan interest rates, the record low cash rate saw many Australians refinancing to fix their home loan at low rates and/or applying to refinance when their fixed periods expired.
See also: Should you fix your home loan interest rate?
Given the rapid rise in rates, those getting in to refinance early faced far lower serviceability barriers. As recent history shows, serviceability criteria can escalate swiftly on the back of rising interest rates and higher living costs, driven by inflation.
It's also wise to put yourself in the best position to refinance so you can be ready to jump. This can mean cutting debts, working extra hours to boost income, or simply researching the market to uncover the best refinancing deals to target. The table below is a good place to start.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Extra Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
5.94% p.a. | 5.98% p.a. | $2,978 | Principal & Interest | Variable | $0 | $530 | 90% |
| Promoted | Disclosure | ||||||||||
5.89% p.a. | 5.80% p.a. | $2,962 | Principal & Interest | Variable | $0 | $0 | 80% |
| Promoted | Disclosure | ||||||||||
5.99% p.a. | 6.02% p.a. | $2,995 | Principal & Interest | Fixed | $0 | $0 | 60% |
| Promoted | Disclosure | ||||||||||
5.93% p.a. | 5.93% p.a. | $2,975 | Principal & Interest | Variable | $0 | $395 | 70% | Disclosure |
See also: Home loan cash back offers and deals
4. Pay attention to banks' age policy
One factor many aspiring refinancers may overlook is the age policies that banks and lenders apply.
Each lender will have varying policies on expected retirement ages and how this may affect home loan repayment down the track.
In other words, if you're in your 50s, you may not be considered for a 30-year home loan term. If you're of a certain age, lenders may ask for an exit strategy, such as future plans to downsize, so they can be satisfied your loan will eventually be paid off.
Different lenders have different age policies so it's important to be sure your age and your strategy will meet the criteria of your intended lender.
See also: What's the maximum age for a home loan in Australia?
Other exit strategies could include paying off a home loan from superannuation when it's accessible, via other investments, or through passive income streams.
See also: Can I withdraw my super early to pay off debt?
5. Keep an eye on loan-to-value ratios
While Australia's property market has historically seen sustained price growth over many decades, there have been periods when prices have been stagnant or recorded negative growth. This is largely beyond the control of homeowners who must bear the brunt of wider property market and economic cycles.
Periods of negative growth are of particular concern to those with higher loan-to-value ratios who can see their home equity eroding to critically low levels even though they're diligently making their home loan repayments.
If, for example, you took out your original home loan at 95% LVR and a more recent property valuation determines a lower home value, you will likely find it extremely difficult to refinance your existing home loan.
Put simply, in cases of negative equity, your home loan is worth more than your property is. Although this is relatively rare in Australia, it certainly does happen, with those in lower equity positions most at risk.
To give yourself the best chance of maintaining healthy equity, it's important you purchase the right sort of property in the first place and do what you can to maintain or increase your property's value.
See also: 6 home renovation projects that may increase your resale value
Paying extra on top of your home loan repayments is an effective way to safeguard - or build - equity and give yourself the best chance of being able to refinance to a lower interest rate or a better home loan down the track.