Time to read : 4 Minutes
What Can Homeowners Expect From Interest Rates In 2023?
Last quarter (and several cash rate hikes ago), my colleague, mortgage broker Sophie Matthews, declared:
This is definitely not the last of the cash rate hikes. Expect more to come, so homeowners who haven't yet reviewed their mortgage should act sooner rather than later.
She definitely called it – and there are a couple of major reasons for this:
1. Tighter credit restrictions
Was it easy to get your home loan a couple of years ago? Or at least, easier?
There’s a reason for that, too.
2. Bumped buffer rate (sounds fluffy, but it’s really not)
When assessing loan applications, lenders apply a buffer to the interest rate they’re assessing you for. Most banks – including the Big 4 – used to add on a 2.5% buffer rate.
So, if the interest rate on the loan you were applying for was 2.5%, the loan assessor wanted to make sure you could make your repayments at 5% – just in case rates rose.
Around 200,000 first home buyers entered the property market between September 2020 and October 2021, after which the buffer rate was increased to 3%.
But the loan assessors were still only adding this 3% buffer on to all-time-low interest rates.
Many applicants for fixed rate loans at under 3% sailed through approvals, and became homeowners in 2020 and 2022.
What happens when the cheap fixed rate period ends?
You’re smart to ask. When these low fixed rates revert it’s to a much, much higher interest rate. Revert rates are usually a lot higher than standard variable interest rates. Yes, even at the same bank.
From paying under 3% interest, these new home owners are now facing rates of above 6% – which is well above anyone’s fluffy buffer.
So that’s reason number one making refinancing harder for new homeowners.
Negative equity is here
The term ‘negative equity’ strikes fear into the hearts of most borrowers, but it’s not just homeowners who get scared when property prices fall.
The banks are nervous too, and they’re tightening lending even further.
How much equity do you have?
Equity is the difference between the value of your property, and the loan you have against it.
Property values aren’t something you can control. If your home is worth less now than when you bought it, you may owe more on your home loan than your home is worth in 2023. This means you’re in negative equity.
For borrowers who took out loans against 80% of their home’s value in 2020 or 2021, refinancing with a lower property valuation is much harder to do.
You may have to pay Lender’s Mortgage Insurance (LMI) to refinance, because you’re now trying to get a loan against 85-90% of your home’s value.
According to bank forecasts, properties purchased in our capital cities since 2021 are predicted to fall in value by an average of 17% by December 2023*.
That’s reason number two making refinancing harder.
This is quite apart from the cost of living increases we’re all facing. Fuel, energy, and basic foodstuffs have all risen exponentially since mid-2022.
The consensus seems to be that we can expect ‘more’.
🏠 More interest rate increases.
💡 More energy price hikes.
⛽ More expensive fuel costs.
In other words, more pain across the board.
Two of the Big 4 banks predict economic conditions will ease before June 2023. The other two predict it might take until at least October 2023.
So while they’re arguing about that, here’s some definitive steps you can take, if you’re worried about your home loan:
1. Negotiate with your bank
If your fixed interest rate is about to revert, start this conversation with your lender now.
Look at other bank offers for refinancing, especially those offering cashback deals. Use these as leverage to discuss a lower revert rate with your bank.
Early break fees are payable if you exit a fixed rate loan early - but this may be far less than the higher repayments on your upcoming revert rate.
Some of the current cashback offers can help offset these break costs. Some lenders are offering up to $4,000 for refinancing.
2. Can you refinance?
Refinancing is definitely getting harder, but it’s not impossible. Speak to a good broker like Sophie about your options, especially if your fixed rate period hasn’t ended yet.
The bottom line
If you can, refinancing is the most proactive step you can take with your home loan in 2023.
A good broker will help you work out your options and plan a way to weather this harsh economic climate.
They’ll find out if refinancing is possible, walk you through the pros and cons of your next steps, and negotiate with lenders on your behalf.
With trusted guidance and careful planning, you can take the first steps towards more financial certainty in 2023.
Go Deeper:
Have you become a mortgage prisoner?
The nature of lag: the RBA bets on rising cash rates to curb inflation
