2023 likely to be a record year for refinancing

An economist predicts 2023 to be a record-year for refinancing, as the Reserve Bank of Australia’s “most rapid” series of rate hikes impact home loan borrowers.

PEXA chief economist Julie Toth said the current series of cash rate hikes has already reached 325bps in less than a year, bringing the target to its highest level since 2012.

“This is the largest and fastest rate rise ever implemented by the RBA — the relatively direct transmission of interest rate rises to variable mortgage rates will continue to take ever larger chunks of income away from mortgage-bearing households through 2023,” she said.

“Refinancing and loan renegotiation activity is likely to remain elevated, as mortgagees seek to reduce their mortgage costs.”

As of 7 February 2023, PEXA’s refinancing index was 172.5 points, which was up 16% from the same week last year but was down 5% from the recent record high of 182 points achieved in December 2022.

This was consistent with the latest figures from the Australian Bureau of Statistics, which reported high levels of refinancing compared to new loan activity over the last month of 2022.

Ms Toth said fixed-rate borrowers would likely see what options they have this year, given that a significant share of the group would have their terms expire in the coming months.

“In total, the RBA estimates that a third of outstanding housing credit by value is currently mortgaged at a fixed rate and fixed term, and that more than 800,000 fixed-rate loans are due to expire during 2023,” she said.

It is crucial to note that among both variable-rate and fixed-rate mortgages, the rate rises “disproportionately” affect middle-income suburban mortgage holders who purchased their home or investment property over the past three years when prices reached record high at record-low interest rates.

“More recent mortgagees tend to have larger mortgages and higher mortgage costs relative to their incomes, compared to home-owners with older loans — with property prices receding from their recent record peaks in many suburbs, increasing numbers of mortgagees will face higher mortgage-to-valuation ratios on their home,” Ms Toth said.

“This change in valuation ratios will materially affect the way in which affected mortgage-holders respond to rising rates, via mortgage refinancing or property resale”

The worst-case scenario, Ms Toth said, is for these mortgage holders to be forced to sell, be pushed into a negative equity, or be trapped in a mortgage prison resulting in a financial stress.

CoreLogic research director Tim Lawless said the latest rate hikes takes borrowers outside of their serviceability assessment at the time they applied for a loan.

“Since October 2021, lenders have assessed new borrowers on their ability to service a mortgage under an interest rate scenario that is at least 300 basis points above their origination rate — the latest lift in the cash rate will push these recent borrowers beyond their serviceability tests,” he said.

“Considering most lenders were showing mortgage arrears to be around record lows last year, it’s likely some evidence of rising mortgage stress will start to emerge in 2023 under such substantially higher interest rate settings, with the potential for a more noticeable lift as further fixed rate borrowers migrate over to variable mortgage rates.”

However, Mr Lawless added that any material increase in mortgage arrears is unlikely if labour markets remain strong.

In terms of the impact of the rate hike on the housing sector, Mr Lawless said further downside risks are to be expected.

“Arguably, a peak in interest rates should support a rise in consumer sentiment and gradually a stabilisation in residential property prices and activity.  However, it’s unlikely housing values will start to appreciate until either interest rates come down or another form of stimulus becomes apparent, such as an easing in credit policy or demand-side incentives,” he said.

The recent peak in home values was in April 2022 — since then, the home value index has already dropped 8.9%, the fastest decline on record which followed one of the fastest and most significant upswings in history.

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Photo by Jenn Miranda’s Images on Canva.