New loan activity wanes but refinancing soars

With the Reserve Bank of Australia (RBA) increasing the cash rate from 0.1% in April to 3.1% in December, high levels of home loan refinancing activity show no signs of abating.

Data from online property exchange PEXA confirm the trend. In fact, the PEXA Refinance Index for the week ending 6 December hovered close to its September 2022 peak of 179.5 points.

Figure 1: Volume of refinances across Australia

 width=

Source: Pexa Refinance Index, 13 December 2022

In December, the RBA indicated that a further increase in inflation is anticipated in the  early months of 2023. It therefore expects to “increase interest rates further over the   period ahead”.

In a recent article, PEXA’s Chief Economist Julie Toth suggests the transmission of interest rate rises to borrowers will continue to negatively impact the disposable income of variable rate–mortgage holders into the new year.

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

“Our consumer research confirms a strong appetite for Australians to shop around for the best loans possible. This is warranted, given that consumers can save an estimated $1,524 per year on average by seeking out new financing options. This is in addition to cash-backs and other incentives being offered to refinancers by major home loan providers.”

The size of refinance loans is also increasing

The Adviser reports that the size of home loans accessed for refinancing is also rising.

The article cites data from Joust’s Live Auction service, which indicates a 6.15% increase in the size of ‘refinance’ loans across Australia, from $508,838 in October 2021 to $540,149 in October 2022.

In the report, Joust Chief Executive Carl Hammerschmidt says that there are now “clear signs” borrowers were not initially prepared for the 2022 rate increases.

According to Hammerschmidt, “the increase in people across most states looking to refinance larger home loans shows that those who got into the market during record low interest rates are now finding themselves over-extended”.

The size of new loans is falling

At the same time, there appears to be fewer new loans granted for residential and commercial property purchases. New homeowners are likewise taking out smaller loans.

Joust data reveals a 16.97% fall in the size of home loans accessed by the online marketplace’s ‘buy’ category, decreasing from $725,586 in October 2021 to $602,430 in October 2022. Loan sizes in the ‘build’ category also dropped 11.17%, from $767,243        to $681,538.

Toth notes that renters who aspire to home ownership may be happy to see house prices fall, 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,” Toth says.

A year to refinance?

According to Loan Market’s Senior Finance Specialist Brett Richardson, 2023 will be a year of refinancing.

“[The year] will see mortgage holders looking to refinance to a lower variable rate or will consider fixing for certainty. Households will need to direct more money towards    mortgage repayments and have less disposable income,” he says in a report by The Property Tribune.

“With the higher cost of living and mortgage repayments continuing to increase in 2023, inflation will continue to be higher. This could see mortgage stress, with property prices possibly declining.”

Mortgage brokers, in particular, should be aware of the challenges and opportunities the new year will bring.

 

SHARE
Back to Insights and News

Related articles

All insights

Non-bank lending preferred by nearly half of Australian SMEs

Small and medium-sized enterprises (SMEs) in Australia are increasingly turning to alternative financing options as they seek a faster and simpler onboarding process. According to the latest SME Growth Index report from ScotPac, the preference of these businesses for non-bank borrowing reached a record high of 47% in the first quarter of 2023. This was…
Read More

A mixed outlook for interest rates and the housing market

The frequency of official interest rate increases has slowed in recent months. It will be interesting to see whether this trend continues and, if so, what impact it could have on the Australian housing market. In April, the Reserve Bank of Australia (RBA) chose to hold the cash rate at 3.6%. In the previous month,…
Read More

Good news for homeowners as housing values decline eases

Australia’s housing value slump has eased, according to CoreLogic’s latest Home Value Index. The index reveals that the rate of decline has been decreasing since September 2022, with February’s 0.14% decrease being the smallest monthly fall since the Reserve Bank of Australia (RBA) began increasing interest rates in May 2022. A 0.3% increase in Sydney…
Read More