Are you looking to get a home loan in 2023?
Well, Ryan Gair, CEO of Rate Money, said that...
"Australians looking to get a home loan in 2023 will experience hurdles or roadblocks they haven’t faced before."
Gair identified the 5 challenges borrowers are likely to face in 2023:
Six months ago, if a home loan had a 2 percent interest rate, banks would assess your borrowing power based on a 5.5 per cent rate – usually 2 to 2.5 per cent higher than your approved rate.
With interest rates now sitting at 5 per cent, the buffer is much higher at 7.5-8 per cent.
“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.”
As a way around this, Ryan says borrowers can consolidate their personal debts like car loans and credit cards into one repayment under their mortgage, which will see them pay a lower interest rate:
“For example, if you have a car loan at 8 per cent interest over five years, rolling this into your mortgage will see the repayments be spread across a 30-year loan at 5 per cent interest instead.
However, it’s important borrowers try to pay this back as quickly as possible and not end up accumulating more debt.”
With the property market falling, so too has the value of people’s property, which may see new homeowners with smaller deposits potentially ‘trapped’.
Those with more than 20 per cent equity in their property can refinance, however, those with a lack of equity could be stuck on a high-interest rate with their current lender or risk paying lenders mortgage insurance (LMA), which can cost between $15,000 to $18,000.
“If you’re in this situation, call your bank and say you’ve found a better rate with another lender, but you would like to remain with them and negotiate a better deal.
The majority will come to the party and give you a better rate so they can keep you as a customer.”
Homeowners coming off ultra-low fixed-rate mortgages will soon be hit with a huge rate rise, with variable loans now sitting at 5-6 per cent – more than double the 2-2.5 per cent rates enjoyed during the pandemic.
For those who have at least 20 per cent equity in their property but may be struggling to pay down their mortgage or have cash flow issues, Ryan says to consider putting their mortgage on interest-only repayments for the next two years while rates are high.
He explained further:
“There are certain lenders who offer this, so speak to a home loan provider like Rate Money who can guide and advise you on this option.
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Moving to interest only will allow you to reduce your monthly repayments for a short term and free up cash flow.”
As interest rates start to soar, homeowners may struggle to make ends meet and miss mortgage repayments which will put them at risk of having a bad credit history.
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.
"Get on the front foot and contact your lender as soon as possible if you think you may miss a loan repayment and request that it not be marked against your credit report.
Banks and financial institutions want to work with you to find a solution, so ensure you keep a clear and open line of communication and return any calls or emails you may receive.”
It’s common for self-employed people to experience cash flow problems during the start and end of the year as businesses close down over the holiday period.
Ryan shared his insight on this situation:
“In the building and construction industry, for instance, many subcontractors won’t have a source of income unless they have another job on the side.
To help you get through this period and create as much cash flow as possible, self-employed homeowners should consider cutting back on spending and purchases as your cash flow could also affect your mortgage repayments personally.
This might be heightened even more with interest rate rises.”
With these challenges borrowers are likely to face in the coming year, Ryan offered a piece of advice on how to overcome these hurdles:
"Between interest rate rises and inflation, households are in for a tough year ahead – particularly homeowners who 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.
We’ll see first-home buyers who tried to outbid investors reach their absolute limit with loan repayments and likely face mortgage stress.
Among the self-employed, cash flow will be one of their biggest challenges, particularly when paired with rising interest rates.
My biggest advice for homeowners is to pay down your mortgage principal and reduce debt as much as possible.
The more, and quicker, you can pay it down, the more equity you will have to draw from in tougher times.
Working with lenders who are agile and flexible, and experts who can guide you along the journey will also help to alleviate stress and hardship.”