New data has revealed a growing equity squeeze as higher rates deepen refinancing barriers for recent borrowers.
More than one in five Australians who bought a home over the past three years remain above the 80 per cent loan-to-value ratio (LVR) threshold, exposing a sizeable cohort of recent buyers to the risk of being locked out of more competitive mortgage pricing.
New analysis from major brokerage and aggregator Aussie Home Loans has found that 20.7 per cent of borrowers who purchased between July 2023 and August 2025 had an LVR above 80 per cent, leaving them with less than 20 per cent equity in their homes.
Further, the research found that 21 per cent of home owners cited “too much effort or hassle” as the chief reason they hadn’t refinanced.
The finding comes after the Reserve Bank of Australia’s (RBA) Monetary Policy Board lifted the cash rate by 25 basis points to 4.60 per cent, its fourth increase of 2026 and the highest setting since late 2011.
Equity buffers under pressure
Aussie said the data pointed to a growing mortgage-prison risk among borrowers who entered the market during the past three years, particularly those who bought with smaller deposits.
Mortgage prison describes the position of a borrower who is effectively unable to refinance to a different lender, even where a cheaper product may be available, because they no longer meet lending criteria.
That can occur where a property’s value falls, raising the borrower’s LVR, or where the borrower fails a lender’s servicing assessment after interest-rate increases.
Aussie Home Loans CEO Sebastian Watkins said rising repayments and declining home values were creating a difficult environment for households with constrained equity.
“It’s a bleak outlook for home owners right now, staring down the barrel of higher mortgage repayments while watching the value of the family home go backwards,” Watkins said.
“The real danger is the trap that creates: as values fall, loan-to-value rates rise; once you push above 80 per cent, the door to a competitive refinance can start to slam shut. That’s how home owners end up in mortgage prison, stuck paying a higher rate precisely when they can least afford it.”
Watkins added that the issue was especially acute for first-home buyers (FHBs), including those who had accessed the federal government’s 5 per cent deposit scheme.
Victoria carries largest share
Victoria emerged as the state most exposed in Aussie’s analysis, with more than half (51.6 per cent) of Victorians who bought between July 2023 and August 2025 currently above an 80 per cent LVR.
The state accounted for 39.9 per cent of mortgage prisoners identified nationally, ahead of New South Wales at 25.4 per cent and Tasmania at 16.6 per cent.
A further 9.2 per cent were located across the Northern Territory and South Australia, while Queensland represented 6.5 per cent and Western Australia 4.2 per cent.
The borrowers identified as mortgage prisoners were also carrying substantially larger debts.
Aussie found their average loan size was $646,000, compared with $536,000 among recent borrowers who had improved their equity position, a difference of $110,000.
The equity problem is occurring alongside a sharp increase in serviceability-related refinancing barriers.
The Mortgage & Finance Association of Australia’s August 2026 Market Sentiment Survey found that 49.2 per cent of the 588 brokers surveyed had seen an increase in clients unable to refinance because of serviceability constraints.
That was more than double the 24.4 per cent who reported the issue six months earlier.
Aussie’s modelling also revealed how quickly higher rates could affect prospective buyers’ borrowing capacity.
It assessed a FHB couple with a combined income of $200,000 after the first three rate rises of 2026 and ahead of the RBA’s September decision.
Their maximum borrowing capacity had declined from $1.089 million before the 2026 rate-hiking cycle to $1,013,038 after the first three increases, a reduction of $75,962.
The research further found that a fourth increase would reduce their maximum borrowing capacity further, to $991,071, taking the cumulative reduction from the pre-hike level to $97,929.
Aussie said this fall in borrowing power would outweigh the benefit of Treasury’s forecast 2 per cent decline in property prices.
Hardship warning
Financial Counselling Australia said the latest rate increase would worsen financial stress for households already struggling with mortgage repayments and broader cost-of-living pressures.
Interim chief executive Jane Pires said lenders needed to offer meaningful assistance to customers in hardship as mortgage stress moved to the forefront of financial-counselling demand.
“Mortgage stress is already the number one concern for people reaching out to the National Debt Helpline,” Pires said.
“Financial counsellors say their clients are very distressed, and for anyone already in financial difficulty with a mortgage to pay, a rate hike is always going to sting.”
Mortgage stress returned as the main reason people contacted the National Debt Helpline in the June quarter, ahead of ATO debt and other credit-related issues.
“The other distressing thing for those in hardship is that many people are dealing with multiple, interconnected pressures at once, across housing, debt and everyday living costs,” she said.
[Related: Bullock labels current rate ‘restrictive’ yet says more hikes possible]
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