Are You Mortgage Locked? How Falling Property Values Are Trapping First-Home Buyers
Auckland resident Sarah bought her first home in late 2021, stretching her budget to secure a property in a rapidly escalating market. Now, with property values down 12% in her area, she’s finding herself unable to refinance her mortgage, despite significantly better interest rates being offered to new customers. Sarah isn’t alone. A growing number of recent first-home buyers are discovering they’re effectively mortgage locked – unable to switch lenders and benefit from competitive deals, a situation poised to become more common as banks aggressively court new business.
The Equity Squeeze: Why Refinancing is Becoming Harder
The recent housing market correction, while opening doors for new buyers, has created a unique challenge for those who purchased near the peak. As property values fall, so does homeowner equity. This isn’t necessarily a problem for those comfortably meeting their mortgage payments and with no plans to sell. However, it creates a significant barrier to refinancing – the process of switching to a new lender, often to secure a better interest rate or loan terms.
“If you bought with a high loan-to-value ratio (LVR), say 80% or higher, and prices have dropped 15-25%, you could easily be in negative equity,” explains David Cunningham, CEO of Squirrel. “That means your mortgage is larger than the current value of your home. Refinancing becomes impossible because lenders won’t approve a loan exceeding the property’s worth.”
Bruce Patten, a mortgage adviser at Loan Market, illustrates the issue with a simple example: “Someone who paid $1 million in mid-2021 with a $900,000 loan now finds their property potentially worth $850,000 to $920,000. Their equity has vanished, and refinancing is off the table unless they can contribute additional funds.”
The Bank Incentive War & Its Uneven Playing Field
Ironically, this equity squeeze is happening at a time when banks are fiercely competing for new customers, offering substantial cashback incentives – sometimes exceeding $5,000 – to attract borrowers. This creates a frustrating paradox: better deals are available, but inaccessible to those already locked into existing mortgages with limited equity.
“Banks are prioritizing new business,” says Jeremy Andrews from Key Mortgages. “They’re willing to offer attractive incentives to gain market share, but they’re less inclined to offer the same benefits to existing customers who don’t represent new revenue.”
The Reserve Bank’s Role & “Dollar-for-Dollar” Refinancing
Fortunately, the Reserve Bank offers a potential lifeline through exemptions to LVR restrictions for “dollar-for-dollar” refinancing. This allows homeowners to switch lenders without increasing their loan amount, even if they have limited equity. However, this option isn’t universally available and depends on individual lender policies.
“This exemption prevents people being locked in,” Andrews explains. “Some banks may even offer cashback to refinance a high-LVR loan under these circumstances.”
Looking Ahead: What Does the Future Hold for Mortgage Locked Homeowners?
The situation isn’t permanent. As property values gradually recover (and most experts predict a slow, steady increase rather than a rapid surge), equity will rebuild, and more homeowners will regain the ability to refinance. However, this recovery could take several years, leaving many stuck with less-than-ideal mortgage terms in the meantime.
But the current landscape is also driving innovation. We’re likely to see:
- Increased pressure on banks to offer loyalty programs: Homeowners will demand more equitable treatment, pushing banks to reward existing customers more effectively.
- Growth of specialized refinancing solutions: Fintech companies may emerge offering innovative solutions to help homeowners navigate the equity squeeze, potentially through shared equity schemes or alternative lending models.
- More flexible LVR policies: As the market stabilizes, lenders may cautiously relax LVR restrictions, making refinancing more accessible.
“The key is to be proactive. Even if refinancing isn’t immediately possible, understanding your options and staying informed about market changes is crucial.” – Jeremy Andrews, Key Mortgages
The current situation highlights the importance of careful financial planning and understanding the risks associated with high-LVR mortgages. While the falling market has opened the door to homeownership for some, it’s also created a new set of challenges for those who bought at the peak.
Navigating the Challenges: What Can You Do?
If you find yourself mortgage locked, here are some steps you can take:
- Talk to a mortgage advisor: A professional can assess your situation and explore all available options.
- Monitor property values: Keep a close eye on market trends in your area.
- Improve your financial position: Reducing debt and increasing income can improve your LVR and make refinancing more feasible.
- Consider a “top-up” loan: If you have savings, you could consider adding funds to your mortgage to increase your equity.
Frequently Asked Questions
Q: What is a high LVR?
A: A high LVR means you borrowed a large percentage of the property’s value. Typically, an LVR of 80% or higher is considered high, meaning you had a deposit of less than 20%.
Q: Can I still refinance with negative equity?
A: It’s difficult, but not impossible. The Reserve Bank’s dollar-for-dollar refinance exemption can help, and some lenders may be willing to consider your application if you have a strong credit history and stable income.
Q: How long will it take for my equity to recover?
A: This depends on property market conditions. Most experts predict a gradual recovery, meaning it could take several years for your equity to return to pre-correction levels.
Q: Is it worth selling my house if I have negative equity?
A: Generally, no, unless you absolutely need to move. Selling at a loss can be financially damaging. It’s usually better to wait for property values to recover.
What are your predictions for the future of the housing market and mortgage rates? Share your thoughts in the comments below!
