Mortgage refinancing rates spike after RBA rate cut

Cash-strapped Australians are rushing to free up money by refinancing their home loans at lower interest rates.

More people are refinancing their mortgages.

A cost of living crunch coupled with sky high house prices has changed the way Australians react to rate cuts with many rushing to free up cash by refinancing their home loans at lower rates.

It leaves investors to dominate the business of taking out new mortgages.

With the second rate cut in the current cycle put through this week, new data shows the February rate cut did very little to stimulate the market. It was the first rate cut in five years but new ABS figures show new home loans fell 3.5 per cent in the three months to March 31.

In contrast, refinancing lifted by 2.5 per cent, and a whopping 22 per cent over the year, as many mortgage holders used the rate cut to refinance their home loans.

Refinancing activity now represents nearly 40 per cent of all mortgage applications. “Australians are jumping at the chance to refinance,” says Christian Stevens, CEO of Flint and Farmers’ Finance Australia.

Among owner-occupiers the move to refinance is also in step with the trend towards longer-term mortgages, where homeowners can cut their upfront costs by paying a lower rate for a longer time.

Around half a million mortgage holders opted to extend the life of their mortgages in order to cut upfront costs in recent months.

“The refinancing is consistent with what we’ve seen on consumer spending,” says Peter Munckton, chief economist at Bank of Queensland.

“People are getting more disposable income after the rate cuts and a chunk of the extra cash is being saved. We should see that trend confirmed in the saving rate in the near future.”

In keeping with the conservative response by Australians to the first rate cut, more people also moved to knockdown and rebuild their own homes, rather than buy a new home in order to avoid stamp duty and other costs.

The Cotality group recently forecast little capital growth for home owners.

“Several factors continue to constrain price growth, including stretched affordability, cautious lending practices, and the reality that despite 50 basis points of easing, interest rates remain in restrictive territory,” the group says.

This week’s 0.25 percentage point cut should reduce the average variable rate for outstanding owner-occupier loans to around 5.8 per cent. It represents an $81 per month saving on a$750,000 loan.

As homeowners refrain from the traditional urge to trade up and take out new mortgages on bigger or better properties, investors are moving quickly with the growth of investment lending volumes already at their fastest pace since 2022.

The question now is whether the cumulative effective of two rate cuts, along with the expectation of further reductions later this year, will spark sufficient confidence among home buyers to purchase new homes in anticipation of riding a wider lift in prices.

Certainly economists and investors are already convinced.

“Regardless of the eventual size of the rate reductions, history would say that house prices typically rise by between 10 to 15 per cent in the two years following a monetary easing cycle,” Mucnkton says.

James Kirby hosts the twice-weekly Money Puzzle podcast.