We're soon heading into a New Year and what a year it has been for the Australian mortgage market.
It is moving through unprecedented change.
With rates rising rapidly, record levels of household debt and the cost of living on the rise, your mortgage decisions could be key to making savings in 2023.
An unprecedented move in mortgages
Following the onset of the COVID-19 pandemic in Australia, the RBA set the cash rate at a record low of 0.1% in November 2020 and signalled that it could stay there for an extended period of time.
Before the pandemic, the cash rate target had averaged 2.55% for the previous decade.
The ultra-low cash rate target was a part of a set of policy measures to get more credit flowing through the economy.
By signalling an extended period of rock-bottom rates, lenders were confident in substantially dropping the price of fixed mortgages.
Figure 1 shows average new mortgage rates by type for owner-occupier home loans>
Source: CoreLogic and Aussie's 'Your Next Mortgage' Report
As the cash rate hit a record low, the price of fixed mortgages soon followed.
In May 2021, average fixed mortgage rates with a set rate of three years or less dipped to a low of 1.95%.
Fixed rates where the set term was greater than three years dipped as low as 1.99% in February 2021.
Average variable rates bottomed out at 2.41% in April of 2022, in line with the last month of the record-low cash rate setting.
Interest rate data from the RBA suggests it is unusual for fixed rates to be low relative to variable rates.
Around 20% of housing lending has been on fixed rates as a result.
But cheap rates through the pandemic created a rare period in which fixed-rate borrowing ballooned, with total housing lending and refinancing on set interest rates peaking at 46% in July 2021.
Source: CoreLogic and Aussie's 'Your Next Mortgage' Report
This has led to the total outstanding value of housing credit in Australia sitting at around 35%, up from less than 20% at the onset of the pandemic, according to the RBA.
The ‘refinancing cliff’ and your next mortgage move
Borrowers who took out fixed-rate loans during the pandemic are likely to face much higher mortgage rates when their fixed terms end.
According to the latest Financial Stability Review from the RBA, around two-thirds of fixed-rate mortgages are set to expire through 2023.
On December 6th, the RBA increased the cash rate by another 25 basis points (to 3.1%), taking the cash rate 300 basis points higher in eight months, which is highly unusual.
In fact, it marks the steepest increase in the cost of debt since the 1990s, when the RBA first started setting the cash rate (Figure 3).
Source: CoreLogic and Aussie's 'Your Next Mortgage' Report
Assuming full cash rate rises are being passed on to mortgage rates, this would put the average new variable mortgage rate for owner occupiers at around 5.08% through December.
The RBA has also estimated that fixed-rate borrowers with expiring terms in 2023 will see rate increases of around 3-4 percentage points.
The reason for the rapid rise comes back to high inflation.
The price of goods and services increased by 7.3% in the year to September 2022, the highest level of inflation in over 30 years.
Tackling inflation early using high, successive rate rises means avoiding a ‘wage-price spiral’ and potentially preventing further pain in the economy down the track.
While the RBA is increasing the cash rate to reduce the potential for long-term high unemployment and inflation, it does mean some short-term pain for mortgage holders.
Namely, those coming up to the end of their fixed-rate terms may see a big sticker shock in their mortgage repayments.
Figure 4 shows what monthly repayments look like for fixed-term borrowers versus variable-rate borrowers since May, assuming the national average home loan size over that month (which was $549,498 according to the ABS).
Source: CoreLogic and Aussie's 'Your Next Mortgage' Report
For those who purchased in 2021, being exposed to variable home loan rates has likely meant a big increase in repayments.
In the example above, monthly home loan repayments on variable rates are estimated to be around $960 higher than at the fixed rate level.
If the cash rate were to rise a further 40 basis points (to 3.5%), the RBA estimates that around 60% of fixed-rate borrowers with terms expiring in 2023 would have increases in their minimum repayments of at least 40%
The table below shows a breakdown of how mortgage repayments could rise over time by region.
Source: CoreLogic and Aussie's 'Your Next Mortgage' Report
- Also read:Sydney housing market update | May 2024
- Also read:Melbourne housing market update | May 2024
- Also read:Latest property price forecasts for 2024 revealed. What’s ahead in our housing markets in the next year or two?
- Also read:CoreLogic National housing market update | May 2024
- Also read:Melbourne property market forecast for 2024
For those who purchased at the lowest point of average fixed rates where the fixed term was 3 years or less (May 2021), we take the median dwelling value and assume a purchase with a 20% deposit.
The table shows the difference between a low fixed rate repayment of 1.95%, versus the payment on an average new variable home loan rate (which we assume may reach 5.71% by mid-2023).
These extremes of lows and highs in mortgage rates show how dramatically home loan repayments could be subject to change in the next 6 months.
The scenario in table 5 shows a 58.3% uplift in mortgage repayments across the capital cities and regions of Australia, ranging from a monthly repayment lift of $565 in regional South Australia to an increase in monthly repayments of around $1,918 in Sydney.
However, this is certainly the more extreme scenario for changes in mortgage repayments for the end of fixed rate terms.
For example, not all borrowers would have made purchases this large at a low rate of 1.95%.
Furthermore, the RBA may not need to hike rates to the highs 3’s if the economy can be slowed down by a smaller rate rise.
Can refinancing help?
Another way borrowers can help to mitigate a jump in housing payments is to consider refinancing.
This can enable the borrower to change the terms of their borrowing, including the structure and interest rate.
Borrowers may be able to find a more competitive interest rate by looking for finance elsewhere.
A lot of Aussies have refinanced through the low-interest rate environment.
According to data from the ABS, a record $18.9 billion in housing loans was ‘externally’ refinanced through the month of August (refinanced with a different bank).
Eliza Owen, Head of Research for CoreLogic shared her insights:
“With the cash rate hitting its highest level in a decade yesterday, the number of mortgage holders increasingly pressed with servicing their mortgage is likely to trend higher.
Throughout 2023 this may result in more conversion of owner-occupied property to investment property, people taking on additional work, and potentially new highs in refinancing.
“We’re already seeing the nation turning to refinancing to achieve more flexibility or competitive pricing in home loans, with a record $19 billion in external refinancing secured through August.
However with the bulk of fixed-term loans expiring over the year ahead, this will become more critical in order to ease the economic burden facing homeowners.”
Source: CoreLogic and Aussie's 'Your Next Mortgage' Report
The volume of financing could grow even further as borrowers look for more competitive rates over 2023.
What to do to avoid a mortgage cliff
1. Homeownership = home loan ownership:
Get to know your home loan.
How does it fair in the market?
What are the fees?
Is it costing you more than it needs to?
Regularly compare the market or have a broker do it for you.
2. Type of home loan could make all the difference:
A changing mortgage market means changing circumstances.
Your home loan should match your current needs.
For example, an offset account could reduce the amount you pay in home loan interest, whilst still earning interest.
Your lower LVR could mean a better rate, or simply you just may not be on the most competitive rate in the market.
3. Ask your lender:
Don’t be afraid to have a hard chat with your lender.
Then compare this rate by talking to a trusted mortgage broker to see if it is of the best value for you.
4. Every month counts:
Paying more than you need to on your mortgage is ultimately delaying your home ownership dreams.
A monthly saving could be working harder and paying your home off sooner.
