More Australians are likely to revisit their home loan arrangements and refinance in the coming weeks as the Reserve Bank of Australia marks its tenth consecutive month of rate increase.
According to PEXA’s Refinance Index, the activity from borrowers restructuring their loans or transferring lenders remained high.
In fact, over the week ending 7 March, refinancing activity went up 7.7% from last month in unadjusted terms. Compared the same period last year, refinancing activity over the week went up 18.5%.
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“Dramatic” impact on borrowers
PEXA chief economist Julie Toth said the 25bps hike this month would add another “dramatic” effect on all variable-rate home loan holders.
“The relatively immediate transmission of interest rate rises to variable mortgage rates is taking ever larger chunks of income away from variable-rate mortgage holders, who account for the majority of Australia’s home loan holders,” she said.
Given that many fixed-rate borrowers are expecting their terms to expire this year, many borrowers from the segment are also going to be affected by the rate rises.
“All of these fixed loans are being reset at a significantly higher cost — in some cases, falling property values may have altered the loan-to-valuation ratio during the fixed term, making a new loan more expensive and difficult to obtain,” Ms Toth said.
According to RBA’s estimate, around 800,000 fixed rate loans are due to expire this year.
Overall, Ms Toth said the aggressive increase in rate hikes will continue to reduce the maximum loan size that prospective homebuyers are able to borrow for their first time or their next home purchase.
The impacts of rate hikes can be observed even in the settlement activity in the affordable housing segment. In fact, the largest drop in settlement volumes by the end of last year was for properties priced below $500,000.
Rate hikes could spur “unnecessary” slowdown
CoreLogic research director Tim Lawless said lenders have been assessing borrowers at a higher serviceability rate than the previously suggested 300 basis points.
“With the cash rate now 350 basis points higher through the hiking cycle to date, along with cost-of-living expenses probably well above what was budgeted, more households are likely to be facing balance sheets that have become thinly stretched,” he said.
The cash rate setting is now 105 basis points above the pre-COVID decade average of 2.55% and this recent hike adds around $160 per month to repayments for a $500,000 owner-occupier mortgage.
Since the start of the rate hikes in May 2022, mortgage repayments on a $5000 home have increased by more than $1,000 per month.
“Although 90+ day mortgage arrears were around record lows at the end of last year, it would be naïve to expect mortgage delinquencies to remain at such low levels,” Mr Reardon said.
“However, a trend towards improved underwriting standards, including lower proportions of high debt-to-income ratio lending and high loan-to-valuation ratio lending since early 2022, should help to keep mortgage defaults relatively low.”
Housing Industry Association (HIA) chief economist Tim Reardon said leading indicators of housing activity have already fallen to their lowest level in 15 years. This could continue as the full impact of the last rate hikes manifests, signalling an unnecessary slowdown.
“Loans for the purchase and construction of a new home fell in January to the weakest month since November 2008 — this is before the full impact of rate increases in 2022 hit the market, let alone the February 2023 increase,” he said.
“There are significant lags evident in this cycle and the full impact of higher cash rates will not be fully reflected in economic indicators until the second half of the year, at the earliest.”
Mr Reardon said the rate hikes also compound the adverse impact of the rising cost of materials, labour and land, as well as the changes in the compliance costs.
“There remains a large volume of work underway that will be completed in 2023 which is obscuring the adverse impact of rate rises on other indicators such as unemployment and economic growth,” Mr Reardon said.
“By continuing to raise rates the RBA will inflict further unnecessary pain on the $120bn housing sector and related industries.”
Photo by Andrea Piacquadio on Pexels.