Refinancing ‘extremely elevated’ as households feel rate pressure

For the week ended 6 December — when the Reserve Bank of Australia (RBA) increased the cash rate by 25 bps to 3.10 per cent — the index revealed refinancing activity was 177.9 points, up +0.4 per cent from the previous week (seasonally adjusted); up by 8.1 per cent from the same week year-on-year; and was hovering close to the recent peak of 179.5 points seen in September 2022.

The “large and rapid series of rate rises” — from 0.1 per cent in April to 3.10 per cent in December — is being felt directly by all variable-rate mortgage holders, it explained, as reflected in the index’s data.

Additionally and interestingly, it confirmed fewer new loans for residential and commercial property purchases. 

PEXA chief economist, Julie Toth, said: “The latest RBA decision raises the cash rate by 300bp in just eight months, taking it to its highest level since 2012.

“This is the largest and fastest rate rise ever implemented by the RBA.

“The relatively direct transmission of interest rate rises to mortgagees will continue to take ever larger chunks of disposable income away from mortgage-bearing households into 2023.

“Looking ahead, the RBA continues to flag the possibility of further rate rises in the new year in order to tame excessive domestic demand in our resource-constrained economy.

“We note further rises are not yet a fait accompli, as globally the latest monthly indicators of inflation in the US showed some very welcome hints of levelling out.

“Locally, we are not seeing evidence of a prices-and-wages inflation spiral, which would necessitate further tightening.

“PEXA’s research indicates that rising interest rates are driving record numbers of borrowers to refinance their loans…”

According to PEXA, there’s an appetite for Australians to shop around for the best loans possible.

This is warranted, it explained, given that consumers can save an estimated $1,524 per year on average by seeking out new financing options.

This is in addition to cashbacks and other incentives being offered to refinancers by major home loan providers, it added.

Ms Toth continued: “For renters who aspire to break into home ownership, local house prices might be falling, but their maximum loan size is becoming progressively smaller as rates increase.

“We are now seeing fewer people moving from renters to first-home-owners, and at lower average price points.

“This places further pressure on rental markets, at a time when rental availability and affordability are at record lows in many locations.”

Questioning home-loan competitiveness

Connective  executive director Mark Haron reflected on December’s RBA decision, commenting: “As we approach the festive season, many borrowers will be thinking how this RBA interest rate decision, and previous ones, will affect their household budgets.”

“Into the New Year as the banks pass on this interest rate increase, the realism will set in, and inevitably lead borrowers to question their home loans competitiveness.

“This of course is when you want your clients contacting you, not the bank or another mortgage broker.

“It’s important for brokers to consider this – if your client is concerned about their mortgage cost or whether they can afford their mortgage, what are you doing to ensure they contact you first?”

No better time than the present

Mr Haron reminded that home loan borrowers have embraced mortgage brokers, with the September quarter Mortgage and Finance Association of Australia (MFAA) survey results reporting over 71 per cent of home loans being financed by mortgage brokers.

“On top of this, over the past two years we’ve seen massive spikes in hyper competitive fixed rates,” he explained.

“As we approach 2023, brokers should prioritise communicating early with clients, especially as these fixed rates will be expiring and repricing and refinancing will continue to be on the rise.”

“At Connective we are seeing a significant number of our brokers embrace digital marketing technology we provide to enable personalised client communication – its uptake has increased by 82 per cent year on year.

“The refinancing spike is a great lead indicator for business growth next year; however, to keep up with demand it’s important brokers utilise technology efficiently and consistently to stay in touch with your clients and ahead of your competition,” Mr Haron explained.

Refinancing may help curb inflation

Reacting to the latest rate rise, Home Loan Experts chief executive, Alan Hemmings, commented: “Inflation remains high and the RBA continues to want to rein it in; however, it is still uncertain what the central bank will do next year.

“Mortgage holders will get a reprieve in January, as the RBA does not meet. After that, some economists predict we’ll see a slowing in cash rate increases. Others expect another half-point to be added to the cash rate.

“What may slow further cash rate rises is that, over the next 12 months, approximately 30 per cent of outstanding mortgages on cheap fixed rates are due to move to variable rates. This means about $270 billion worth of mortgages are expected to experience an interest rate increase of 3 percentage points.

“This will place additional pressure on households and may help curb inflation.

“For those customers who have a fixed rate that is due to expire, being aware of what interest rates are available in the market is very important — so is reading the fine print on any advertising of ‘cheap rates’.

“We are seeing a number of lenders offer supposedly cheap rates, but the fine print details further increases down the road.

“The lenders, in an effort to attract new business, are slowing the rate at which they pass on interest rate increases to new customers.”

[Related: New loans and refinancing dropped in September: PEXA]