Rising interest rates lead to a surge in refinancing

Homeowners are refinancing their mortgages at record highs as the impact of rising interest rates begins to be felt.

The latest data from the Australian Bureau of Statistics shows that $18.88 billion in home loans were refinanced in August, an increase of 5.3% from the previous month.

RateCity.com.au research director Sally Tindall said refinancing hit a record high as the Reserve Bank of Australia continued to raise interest rates.

“We expect the refinancing boom to continue for several months as borrowers look for a way to combat rising rates,” Ms Tindall said.

“A growing number of borrowers will also begin to cut their ultra-low fixed rates over the next year, many of whom will consider refinancing at that time.”

Ms Tindall said one concern for refinancers was that with higher interest rates some borrowers might not qualify for a new home loan based on their current income levels.

“The problem is that many borrowers may find it difficult to refinance due to rising rates and falling house prices, putting them in mortgage jail,” she said.

“Some borrowers could end up in mortgage jail because they don’t pass the bank’s creditworthiness test or don’t have enough equity in their loan.”

According to the ABS, first-time home buyers have also made a comeback, with the number of settled loans up 10.4% in August from the previous month.

Although the number is still down from last year, with 26% fewer first-time home buyers entering the market than in August 2021.

Ms Tindall said with house prices falling as rates rose, first-time home buyers were finally getting a peek.

“It’s possible that many first-time home borrowers have been patiently waiting for the final round of places to open under the federal government’s program to help first-time homebuyers with small deposits,” she said.

In July, an additional 35,000 places opened up for first-time home buyers under the First Home Guarantee, where the government acts as a guarantor for first-time home buyers who take out loans with deposits as low as 5%.

“We could see a further increase in the number of first-time home buyers over the next couple of months, despite the market downturn.” said Mrs. Tindall.

Meanwhile, the total value of new loans fell another 3.4% month-over-month to $27.39 billion.

Ms Tindall said the number of investors was slowing as rate hikes continued to bite.

“Real estate investors continue to decline, with the value of investor loans falling 4.8% month-on-month in August,” she said.

“These data indicate that many investors still have their plans on ice, as they see exactly how far rates will go up and whether prices will fall further.”

Ms Tindall said borrowers were reluctant to lock in their interest rate in the current environment.

“Borrowers continued to walk away from fixing, with the proportion of fixed loans funded in August falling to just 4% – light years below Covid levels,” she said.

“At the peak of July 2021, when borrowers could lock in rates below 2%, 46% of all new loans were fixed.”

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