Lending rules lock borrowers in a mortgage prison.

With the recent changes in how lenders calculate living expenses and loan amounts, many homeowners have discovered that the loans they took out are now larger than what a bank would lend today.

This means that these homeowners are left with no choice but to stick with their current lender, with no chance of getting a better interest rate from refinancing with another bank.

Industry watcher and lending expert Steve Jovcevski told News.com.au that those who bought a home and borrowed over the last five years are stuck with a high-interest rate and are potentially paying thousands more over the life of their loans. In fact, many banks have already introduced changes in their variable home loan rates over the past weeks, despite the central bank's decision to hold the official cash rate at 1.5%

Also Read: Distrust in banks grows amid Royal Commission probe

To demonstrate, he gave an example of a couple earning $120,000 who purchased a home in 2013 and borrowed $800,000 at 5% per annum. Under the new rules, which estimate expenses with a buffer of up to 2%, the couple would only be allowed to borrow $680,000.

“When a customer is essentially tied to a provider, they are at the mercy of whatever rate rise or conditions the bank chooses to impose. Given the current situation, banks have the power to hold some of their customers prisoners,” Jovcevski told News.com.au.

Grattan Institute fellow Brendan Coates told News.com.au this was an unexpected impact of tighter lending rules, and that this would largely impact those who had borrowed more than 90% of the value of their homes.

With the still ongoing banking royal commission, lending regulations are expected to be tightened even further, which could cause more people to be locked into their mortgages with no way out.


Related stories:
Why it may be wise to switch to a fixed rate now
Affordable homes await future home buyers