Mortgage refinancing reaches new heights in biggest states

Australian mortgage borrowers are responding to the successive rate hikes by reviewing their current loans, with refinancing activity surging over the year in Australia’s four biggest states.

PEXA’s latest report shows that refinancing activity hit record levels in 2022, with more than 378,000 refinances recorded in New South Wales, Victoria, Queensland, and Western Australia that represented 11.4% annual increase.

Victoria led the country with the greatest volume of refinances, with over 134,000 transactions completed in the state in 2022, an increase of 7.7% compared to the previous year.

While refinancing reach new heights, new loans taken out in 2022 to fund the purchase of a residential property were down 12.8% on 2021 levels.

Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.

New South Wales had the highest average residential loan amounts in the year at $841,500. It also had the highest average loan-to-value ratio at 77.1%.

PEXA head of research Mike Gill said these results shed insights on how Australia’s refinance market was driven in 2022 by homeowners seeking a better deal on their mortgage amid the successive rate hikes by the RBA.

“As the report also shows, this growth in refinances partially offset the declines in new loans, a trend that reflects lower property settlement levels as sales come-off pandemic era record highs,” he said.

PEXA chief economist Julie Toth said while new residential loan volumes fell back from 2021’s record highs in New South Wales, Victoria, and Queensland, the level was still above the pre-COVID records.

“This reflects an immediate demand-side reaction from home buyers to the deliberate dampening effect of increasing interest rates during 2022 and to the peak in home pricing in most locations in this cycle,” she said.

“Separate to rate rises, the level of activity continues to normalise, which was always expected, since some of the increase in home buyer demand through 2020 and 2021 was effectively 'brought forward' by HomeBuilder, first home buyer incentives, record low interest rates and other measures to temporarily support housing demand during COVID-19 and the cessation of population growth.”

Ms Toth said 2023 is poised to be a record year for refinancing, as more borrowers feel the pinch of the rate hikes.

“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”

Getting out of the mortgage prison

With the cash rate now at its highest since 2012, many borrowers are expected to feel the impacts on their repayments.

Two Red Shoes mortgage broker Brett Sutton said borrowers are at risk of being caught in a mortgage prison.

“Economic modelling suggests that as many as 15% to 20% of mortgagors can become bogged down with a loan they have no prospect of refinancing — those who purchased their homes in the past two years are particularly vulnerable to becoming trapped in their mortgage,” he said.

Mr Sutton shared some tips that can help borrowers get out of the mortgage prison and prevent further risks of mortgage stress:

Manage debt-to-income ratio

Mr Sutton said it is a must to be mindful of other consumer debt like car loans, credit cards, and investment property loans.

“More often it's the subsequent debts and loans that a mortgagor has taken out after getting their home loan that’s causing the issue,” he said.

“Mortgage holders should consider closing or reducing their unused credit cards, timing the payout of car loans with the expiration of the fixed rate loan roll off, and temporarily halting investment spending to reduce their risk.”

Refinance earlier to get ahead

Given that rates are likely to rise further this year, Mr Sutton said it might be wise to refinance sooner.

“As interest rates rise, so do the calculated repayments — as part of responsible lending policy banks stress test the loan at a rate of 3% above the interest rate offered,” he said.

This means that borrowers may no longer qualify with the standard assessed buffer of 3% now that rates are at the 5% levels.

“Those concerned about an upward trend in interest rates should do what they can to maximise income prior to applying by taking additional hours at work or waiting until after the pending pay increase to apply.”

Know the changes to banks’ policies

The surge in inflation has increased the cost-of-living expenses of many households — this means that banks also changed their calculation of living expenses when assessing applications.

Mr Sutton said mortgage holders should consider reducing discretionary spending for three to six months prior to applying for refinancing.

“Applicants should also inform their bank or broker of any items that might mitigate their living expenses such as having the private use of a company vehicle,” he said.

Another change worth noting is the banks’ age policy. This is crucial for those in owner-occupied situations where the loan term will exceed the bank’s deemed retirement age.

“Mortgage holders should keep this in mind as they plan for the future. Having a viable exit strategy such as downsizing can assist with managing potential pitfalls,” Mr Sutton said.

Check loan-to-value ratios

With property prices falling, borrowers who purchased at 95% loan-to-value ratio might already fall into negative equity. A decline of 10% in property values would already put borrowers into negative equity.

“Similarly, those with a loan-to-value ratio of 80% may be subject to an increase in interest rates if the market retracts by 10%,” Mr Sutton said.

“This is due to banks basing interest rates on loan-to-value ratio tiers. Consequently, this could push borrowers to a higher rate and render them unable to afford to change as rates continue to climb.”

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