19 May 2026

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We had a call last week from a client we settled in late 2023. Decent income, two properties, never missed a repayment. He'd seen the sharper rates being advertised, called his bank for a pricing review, got a token discount, and figured he'd refinance. Three weeks later the new lender came back with a "decline on serviceability". Same income, same properties, same clean credit file. The number just didn't work anymore.

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That's mortgage prison. And in 2026, with three RBA hikes already this year and serviceability buffers biting harder than they did 18 months ago, a lot more borrowers are in it than realise. If you've thought about refinancing and either haven't tried, or have tried and been knocked back, this one's for you.

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What Mortgage Prison Actually Is

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Mortgage prison is industry shorthand for being locked in with your current lender because no other lender will give you a competitive replacement loan. It's not about credit defaults or missed repayments. It's about serviceability.

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The mechanics are straightforward. To refinance, you have to qualify at the new lender's serviceability assessment. That assessment uses the APRA 3 percentage point buffer, so your repayments get stress-tested at around 9.25% to 10% depending on where rates sit. Your income, your living expenses, your existing debts and credit limits all go into the equation. If the numbers don't leave a positive surplus at the assessment rate, the new lender says no.

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The cruel part is that you can be paying your existing loan comfortably at the actual rate, but not qualify to move it across to a new lender at the same balance. Your current bank doesn't have to reassess your serviceability while you stay with them. The moment you try to leave, every other lender does.

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Why It's Happening More in 2026

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Three things have come together this year to push more borrowers into this position.

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The three RBA hikes have lifted assessment rates across the board. Each hike adds to the stress-test rate, not just the actual rate. A borrower who comfortably passed a serviceability test in late 2025 at one cash rate setting may not pass it now even though their financial situation is identical.

Property values have softened in parts of Sydney and Melbourne. Cotality's May 2026 housing analysis has both cities in the early stages of decline, with mid-sized capitals slowing. If your property is worth less than it was, your loan-to-value ratio is higher than it was, which limits which lenders you qualify with and what rates they'll offer.

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HEM benchmarks have moved up with inflation. The minimum living expenses lenders apply to your file is materially higher than it was three years ago. Even if your actual spending is the same, the lender will assume you spend more, which compresses your surplus and your borrowing capacity.

The combined effect is that borrowers who were comfortably refinanceable a year or two ago are now finding the door has quietly shut.

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How to Tell If You're In It

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Some signs you might be heading toward mortgage prison territory:

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You called your lender for a pricing review and got a small discount, but the rate is still well above what new customers are being offered.

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You started a refinance application elsewhere and the broker or banker came back with a "marginal" or "not quite there" answer on serviceability.

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Your loan balance has barely moved because rates went up faster than your repayments paid the principal down.

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Your loan-to-value ratio is sitting above 80%, particularly if your property is in an area where values have cooled.

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You're paying off a HECS debt, a car loan, or have credit card limits that are higher than they need to be.

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None of these on their own means you're stuck. But two or more together is worth taking seriously.

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What Actually Works to Get Out

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Mortgage prison isn't permanent for most borrowers. The path out depends on what's causing it.

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Reduce or remove the debts that are eating your serviceability. Credit card limits are the fastest lever. Lenders assess your serviceability against the full credit card limit, not your balance. A $20,000 limit you never use is costing you around $80,000 to $100,000 of borrowing capacity. Reducing or closing unused cards before reapplying genuinely shifts the numbers.

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Personal loans, car finance, and BNPL accounts come next. Clearing a $300 a month personal loan can free up enough capacity to make a refinance work that wouldn't otherwise.

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Look outside the big banks. Non-bank lenders (Liberty, Pepper, Resimac, Firstmac, La Trobe and others) aren't bound by APRA's 3% serviceability buffer. They typically use a 1 to 2 percentage point buffer instead. For borrowers who are tight on serviceability at a major bank, a non-bank lender can be the difference between approval and decline. Rates are usually 0.30% to 0.60% higher than a sharp big-bank rate, but a rate you can actually access beats a rate you can't.

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Choose a lender that treats your income type favourably. Self-employed borrowers, contractors, casual income earners, and anyone with bonus or commission income get shaded differently at different lenders. Some count 100% of overtime, others count 60%. Some accept two years of self-employed income, others want three. A borrower who's declined at one lender might be comfortably approved at another simply because the second lender shades the income less aggressively.

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Extend the loan term to lift assessed capacity. A 30-year loan has lower assessed monthly repayments than a 25-year loan, which lifts your serviceability headroom. Over the full life of the loan you'd pay more interest, but if capacity is the bottleneck, this can be the lever that gets a refinance over the line. You can always make extra repayments later to shorten the effective term.

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Ask your existing lender for a retention deal first. Before going to the refinance market, call your current lender's retention team and ask for a pricing review. Quote competing rates that fit your situation. The discount they offer to keep you is often significant. It's not always enough on its own to fix the problem, but if a refinance isn't viable right now, it reduces what mortgage prison is costing you.

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When the Numbers Won't Work, Yet

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For some borrowers, none of the above is going to get a refinance across the line right now. That's worth knowing too. If your serviceability is genuinely too tight, the honest answer is to focus on the position rather than the rate.

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Build the buffer. Pay down consumer debts. Wait for any salary increases or bonuses to land. Hold off on major purchases that would add new debt to the file. In some cases, waiting six to twelve months before reapplying is the right call, particularly if you've got a pay rise on the horizon or a personal loan about to be cleared.

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A good broker will tell you that honestly rather than pushing a refinance that's not viable. The worst outcome is a declined application sitting on your credit file, which can make the next attempt harder.

 

Where We Come In

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This is exactly the kind of scenario brokers add real value to. We can run your file across multiple lenders simultaneously, identify which ones treat your income type and your existing debts favourably, and tell you honestly whether a refinance is going to work or whether the better play is to stay where you are and focus on position.

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If you've tried to refinance and been told no, or if you've been quietly assuming you're stuck without actually testing it, get in touch. We'll work through the numbers properly and give you a clear answer.

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Have a chat with the team at Claremont Financial.

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