Loan Refinancing Reaches Unprecedented Heights
Let’s have a look at the driving forces behind this refinancing frenzy.
The pause in rate hikes
A collective sigh of relief echoed through the hearts of mortgage holders when the Reserve Bank of Australia (RBA) left the cash rate untouched at 4.1% in July. The July decision marked the first-rate freeze in over 12 months, with rates also put on hold in the following months. It came as a much-needed respite for both current and prospective mortgage holders who have been grappling with the effects of interest rate increases since May of last year.
The good news is that Australia’s housing markets displayed remarkable resilience earlier this year, setting them on a path to recovery since around March. We have witnessed a gradual uptick in property prices and sales volumes across various locations. This break from rate hikes was expected to restore confidence in the housing market’s outlook, especially for those who rely on mortgages to fulfill their homeownership dreams.
The elusive ‘mortgage cliff’
One question that loomed large was the infamous ‘mortgage cliff’ anticipated to impact up to 800,000 fixed rate borrowers in 2023. Surprisingly, or not so surprisingly, this much discussed ‘mortgage cliff’ has yet to make its feared appearance.
Instead, a different trend has emerged. Record numbers of borrowers are actively engaging in loan refinancing while reevaluating their discretionary spending habits. This shift appears to be a strategic response to the ‘new normal’ of higher mortgage costs while diligently keeping up with mortgage commitments.
Factors driving the refinancing surge
Several factors have converged to drive this surge in loan refinancing:
1. Lower interest rates
When ‘loyal’ mortgage holders reach the end of their low fixed interest rate term, often the current lender doesn’t acknowledge their loyalty by providing them with the most competitive rates. Instead, many lenders reserve their most favourable interest rates for new customers, often assuming that existing borrowers will simply accept the terms they are rolled over to. This phenomenon is commonly referred to as ‘loyalty tax’, a familiar term used in the finance sector.
Many homeowners are realising they may secure lower interest rates by refinancing their existing mortgages by switching to a different lender to snap up some of these incentivised rates. Regular refinancing can translate into savings over the life of the loan.
Considering the present financial landscape, if you haven’t reevaluated your loan since transitioning from a lower fixed interest rate, it would be wise to touch base with us for a loan review.
2. Better loan features
Some homeowners have taken the initiative to explore loan features and terms that better align with their evolving financial needs. These adjustments may offer a more personalised and effective approach to managing one’s mortgage.
3. Debt consolidation
Another strategy homeowners consider employing is debt consolidation to streamline their financial commitments. By consolidating multiple debts into one main loan, they can simplify their financial payments and potentially secure a lower interest rate, reducing their overall long term financial burden.
A deeper understanding of mortgage rates
To make informed decisions regarding your mortgage and the timing of a refinance, it’s good to understand some of the factors that may influence mortgage rates in Australia.
Here are some key considerations:
Economic cycles
Economic cycles play a significant role in shaping mortgage rates. During periods of economic growth (as seen coming out of the pandemic), the RBA considers raising interest rates to control inflation. This typically leads to higher mortgage rates. In contrast, during economic downturns (as seen at the beginning of the pandemic), the RBA tends to reduce rates to stimulate economic activity, potentially leading to lower mortgage rates. And that is exactly what happened in 2020-2022.
Government policy
Government policies and regulations can influence mortgage rates. Financial assistance programs, first home buyer incentives, small business grants and regulatory changes can impact market conditions, indirectly affecting mortgage rates.
Global economic conditions
The global economic landscape has ripple effects on the cost of everyday living including mortgage rates. International trade, geopolitical events and global financial stability can all influence the local rate environment.
Inflation
Inflation is a vital factor in determining the purchasing power of money. As we witnessed higher price levels leading to reduced purchasing power in the last 18 months, higher inflation tends to lead to higher mortgage rates as lenders adjust rates to maintain their real returns.
Market forces
Supply and demand within the housing market and broader financial market play a crucial role in shaping mortgage rates. When there is a competitive lending environment as we saw early in the year with lenders offering attractive incentives enticing borrowers to switch, it can result in more favourable terms for borrowers.
Navigating the new normal
Staying informed about interest rates and potential opportunities is crucial for your financial literacy. As your mortgage broker we encourage you to take a proactive approach to educate yourself about optimal times for refinancing.
Keep a vigilant eye on market trends and always feel free to reach out to us to explore your refinancing options. The financial world is ever evolving and, by remaining adaptable with our help, we aim for you to confidently navigate these uncharted waters.
In these competitive and tough times, mortgage holders need to make savvy financial choices.
You do not have to face the ‘new normal’ alone. If you have questions or need guidance, we are here to assist you. Feel free to reach out to us, your trusted mortgage specialists.
If you'd like help with assessing your personal and financial situation, as well as comparing the loans in the market to see if you're truly getting the right deal for you, then call Bob Malpass now on 0431 862 136, email [email protected]
Thanks for reading
Bob
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