Borrowers are likely to find themselves in a quite challenging position as they navigate the uncertainties of 2023, given the rising interest rates and tightening lending conditions.
Rate Money CEO Ryan Gair said 2023 is going to be tough for many households as they face the impacts of the successive rate hikes and the still high inflation.
"Homeowners might be trapped in a mortgage prison due to lack of equity in their property and those just coming off fixed-rate loans who will see their repayments double,” he said.
“We’ll see first-home buyers who tried to outbid investors reach their absolute limit with loan repayments and likely face mortgage stress.”
5 biggest challenges for borrowers in 2023
Mr Gair shared how to overcome these five hurdles over the coming year:
1. Less borrowing power
Given the increase in interest rate, borrowers are now assessed at a higher buffer rate.
Six months ago, a home loan with a 2% rate would be assessed at a serviceability rate of around 5.5%. With interest rates now sitting at around 5%, this means that borrowers will be assessed at a rate of up to 8%.
“We will see banks tighten their lending even further, even to those on higher incomes, and it will make it harder for borrowers to get a home loan,” Mr Gair said.
How to overcome this challenge: Borrowers whose borrowing power is impaired by other personal loans (care loans or credit cards) can considering consolidating all their debts into one repayment under their mortgage, allowing them to pay a lower interest rate.
2. Likelihood of mortgage prison
As property values fall, homeowners with smaller equity in their assets could fall into trap. While those with more than 20% can refinance easily, those without would find it hard to renegotiate their current mortgage terms.
How to overcome this challenge: Borrowers with low equity but would like to refinance can pay for lenders mortgage insurance (LMI) — this, however, is an expensive option as it could cost between $15,000 and $18,000. The cheaper or no cost option is for borrowers to reach out to their banks and try to negotiate a better deal.
3. Double repayment for fixed-rate borrowers
Those coming from ultra-low fixed-rates set to expire in 2023 might face a massive jump in repayments — variable loans are already sitting at around 5% to 6%, which is already more than double than the level seen during the height of the pandemic.
How to overcome this challenge: Borrowers can check if their lender would allow them to shift to an interest-only option for the next two years while rates are high. This will lower the supposed monthly repayments and would give enough time for borrowers to adjust.
4. Risks of bad credit history
Borrowers impacted by the increasing living costs might struggle to keep up with their repayments, which would put a red mark on their credit history. This would eventually impact their ability to refinance to a better deal.
"Even if they do catch up, lenders look at six months’ clear credit history – without it, you may not be able to refinance. Missing repayments over time also impacts your ability to borrow in the future," Mr Gair said.
How to overcome this challenge: Struggling borrowers must reach out to their banks’ dedicated financial support team to explore their options. They can either pause their repayments or switch to an interest-only option.
5. Cash-flow issues for self-employed
Self-employed borrowers typically face cash-flow issues at the bookends of the year as businesses close down over the holidays. This may hinder their ability to pay for their mortgage over the short term.
How to overcome this challenge: Self-employed and business owners should consider cutting back on spending and purchases and plan ahead over the coming year to ensure that their mortgage payments are not affected.
Photo by engin akyurt on Unsplash.