Mortgage prison explained: Why some home owners can't refinance to a cheaper loan

Falling property values, rising interest rates, soaring household costs and stagnant wages are potentially trapping Australian home owners in a “mortgage prison”.

A Finder survey has found 46 per cent of mortgage holders are exposed to cost-of-living pressures and economic shifts that would leave them unable to refinance their loan with a different lender at a lower rate. 

Finder home loan expert Richard Whitten says even someone with an impeccable record can become a mortgage prisoner.

“Many of these borrowers have never missed a repayment, but because their expenses have risen or they no longer meet today’s lending criteria, they can’t qualify for a cheaper loan that could actually improve their financial position,” he says.

“A lot of people will be in a much worse position, unless they have had substantial pay rises. I think people’s expenses far outstrip their income.” 

Finder’s 2026 Home Loan Report also found one in four borrowers (22 per cent) say their income is too low or their expenses are too high to qualify for refinancing, and 14 per cent say they don’t have enough equity in their property.

“It’s probably quite a high number, because we think that when you buy a house the price will go up, but obviously not, especially now we’re seeing prices soften,” Whitten says. 

A further 13 per cent say they are hemmed into a fixed-rate loan, and 9 per cent confess they don’t know how to get out of it. “I honestly think a lot of people don’t even know that you can switch a home loan,” Whitten says.

Competitive mortgage rates are below 6 per cent, but the average is around 7 per cent. The dollar difference is significant. “It can be hundreds a month – worst case, even more,” Whitten says.

What is ‘mortgage prison’ and why are borrowers stuck?

“Mortgage prisoner” sounds buzzy and viral, but it emerged in 2019 from public hearings held by ASIC into responsible lending.

“It’s a change in the environment or in your own circumstances that makes you less eligible for a home loan than you once were,” Whitten says. 

He says mortgage prison is a “story of the times we live in”. Fifteen cash rate hikes in a few years have combined with soaring household expenses, while wages haven’t kept up.

Young families who bought a property recently and don’t have much equity are especially vulnerable. “Having a kid is a big one, if you’ve gone from one income to two temporarily, and daycare costs are huge,” Whitten says.

Why are mortgage holders being knocked back for refinancing?

Higher interest rates aren’t the only culprit. Soaring utilities and grocery bills, changes to employment hours and new debts such as a car loan, a separation or a new partner can all change the level of risk in the eyes of a lender.

Banks look at borrowers’ expenses and stress test them at 3 per cent above the current rate. For example, someone who got their original mortgage at 5 per cent interest was tested at 8 per cent and passed, but the mortgage they want to refinance to has a 6.5 per cent rate and a test level of 9.5 per cent, so they fail.

Mortgage broker Chris Hutton, founder of Chris Hutton Home Loans, says brokers can look at what’s on a customer’s credit file (with their permission) and give advice.

“We can see what the bank’s going to see, and we can know the questions they’re going to ask,” he says.

Can falling property values stop you from refinancing?

Yes, says mortgage broker Joseph Daoud, founder and chief executive of itssimple.com.au, because the debt doesn’t move.

“When housing values drop, that doesn’t mean your debt drops at the same time – that means that your LVR [loan-to-value ratio] has increased,” he says. “And if your loan-to-value ratio is now over 80 per cent it makes it more difficult for you to be able to refinance because there’s a lender’s mortgage insurance fee.”

Whitten says it often pays to wait until you have more than 20 per cent equity in your property.

Can you negotiate a lower interest rate with your current bank? 

Hutton says new home loan customers are often lured by a lower rate and existing customers should ask for the same.

“Lenders do focus on new business and just seem to expect loyalty, and clients that don’t want to pay the loyalty tax will up and move.” 

Whitten agrees there is no harm in asking. “The worst thing they’ll do is just say no. It’s incredibly easy to do.”

How can you escape mortgage prison and get a better interest rate?

Daoud says some customers are intimidated by the concept of refinancing and don’t try, but they should. “People hate rejection – it’s an uncomfortable part of life – so they often don’t take the step to go through the process. 

“There’s so many home loan products out there, it’s a tough market to navigate.” 

Hutton says borrowers sometimes have more options than they realise. “It’s usually that they’re misinformed,” he says.

Cutting back on expenses can improve eligibility but isn’t the only way.

“There’s no point thinking you can live on beans and ramen noodles, when that’s not going to be the solution,” Hutton says.

He adds there are “alternative servicing pathways” within the big four banks and non-bank lenders. “With most of these, the lender can assess using a 1 per cent buffer, or even no buffer, as well as the person’s repayment history,” he says.

Can extending your home loan lower your repayments?

Daoud says young borrowers can give themselves temporary breathing room by stretching a 25-year mortgage to a 30-year mortgage. “This might sound counterproductive, but it will help your cash flow in the short run. It’s not a permanent solution, or silver bullet for every individual.” 

Fixed-rate mortgage holders may be better off waiting for the term to expire than trying to change lenders, Daoud says, because the expensive break penalties can outweigh the benefits of refinancing.

What should you do if you think you are a mortgage prisoner?

Whitten says to see a mortgage broker before assuming you’re out of options. “Brokers are particularly good at the eligibility piece for people who are having difficulty getting approved,” he says. 

He says to examine income, budget and outgoings to look for ways to save money on energy, utilities, internet and insurance. “Once you start doing that, you can substantially reduce your spending and be in a better position.” 

Daoud says consolidating debts can also produce savings. “A car loan is usually at a higher rate than a home loan so if your house value is high enough, you can roll the car loan into your mortgage and have one repayment,” he explains. “Your mortgage repayment might be slightly higher, but you might be better off by hundreds of dollars a month.”