Some mortgage borrowers are caught in something of a Catch-22 of the banking regulator's making.
Because APRA removed a 7% floor on its mortgage serviceability test, many borrowers were offered loans during the pandemic period based on whether they could afford repayments if their mortgage rate rose to 5%, in some cases perhaps even less than that.
A typical variable mortgage rate is now closer to 6% after the RBA's latest rate hike, so that leaves these borrowers paying more than the maximum they were tested to be able to afford.
I wrote about the problems this was likely to create late last year, before the RBA added a further percentage point to the cash rate so far in 2023.
One way to try and close that gap is by refinancing to one of the cheaper rates in the market.
But to do that, you have to meet the serviceability test again. But this time, instead of being tested on whether you can afford rates around 5%, you'll be tested on whether you can still pay your mortgage at 9% interest rates.
Research from RateCity has found a family of four, where one parent works full-time and the other part-time at half the wage, on a combined annual income of $143,221 before tax, will have seen their maximum borrowing capacity drop by $247,700 as a result of the 12 RBA hikes and the current serviceability test.
That leaves many people in mortgage prison, stuck on an uncompetitive rate but unable to switch lenders to a better deal.
Today APRA has written to the banks, credit unions and building societies that it regulates warning them not to be too generous with serviceability test exemptions that could help some borrowers get out of mortgage prison.
"APRA requires banks to have prudent policies and processes for dealing with exceptions to policy.
"Large volumes of exceptions can create risks by weakening banks' risk profiles and increasing the vulnerability of their loan books to future shocks.
"Historically, serviceability policy exceptions have accounted for a small share of banks' total housing lending, at between 2 and 3 per cent.
"It is important that exceptions are used in a prudent and limited manner, so as not to undermine the intent of the core policy.
"In using exceptions, APRA expects banks to make a prudent assessment of repayment capacity so that there is a good outcome for borrowers and the financial system."
Given that estimates from some of the major banks and leading bank analysts put between 15-25% of borrowers in this situation, it seems most will remain stuck in mortgage prison for quite a while yet.