Borrowers to face home loan challenges in 2023, expert says
A finance expert has warned of a challenging year ahead for homeowners and new borrowers as the number of online searches related to refinancing doubles.
Mortgage prison and the fixed rate cliff – two home loan hazards that Aussies could be facing next year as interest rates rise and property prices fall.
A home loans expert has warned 2023 could prove a challenging year for homeowners facing higher loan costs and a drop in the value of their property.
Rate Money CEO Ryan Gair said borrowers who locked in a low fixed rate mortgage throughout the pandemic may find their repayments more than double once the term expires.
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Those who purchased with a small deposit may become “stuck” paying an unfavourable rate if the value of their property drops and they own less than 20 per cent in equity.
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It comes as Google searches related to refinancing doubled in Australia in 2022 and the number of refinancing queries at Great Southern Bank increased by 26 per cent year-on-year.
A survey commissioned by the bank found 94 per cent of those refinancing were doing so because of rising interest rates and the higher cost of living.
Mr Gair said first home buyers and those who borrowed close to their limits were the most vulnerable as they could find it challenging to refinance without paying the extra cost of Lenders Mortgage Insurance.
“We’ll see first home buyers who tried to outbid investors reach their absolute limit with loan repayments and likely face mortgage stress,” he said.
“Among the self-employed, cash flow will be one of their biggest challenges, particularly when paired with rising interest rates.”
This would be particularly true for those whose work slows down over the holiday season, he said.
Buyers would also face a reduction in the amount they could comfortably borrow as interest rates continued to rise.
While interest rates averaged about 5 per cent, banks were assessing borrowers based on their capacity to make repayments at 7.5-8 per cent, which limited the amount they could potentially borrow.
“We will see banks tighten their lending even further, even to those on higher incomes, and it will make it harder for borrowers to get a home loan,” he said.
He said borrowers could consider consolidating their debt in order to reduce the amount of interest charged across different loans.
“My biggest advice for homeowners is to pay down your mortgage principal and reduce debt as much as possible,” he said.
“The more, and quicker, you can pay it down, the more equity you will have to draw from in tougher times.”
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Originally published as Borrowers to face home loan challenges in 2023, expert says
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