The Australian housing market has been in a state of flux for the last few years. After a period of strong growth, the market has started to cool off with home prices falling in some areas and remaining relatively stable in others.
One of the major factors that have influenced the housing market in Australia is the interest rate environment. For several years, the Reserve Bank of Australia (RBA) has kept interest rates at historically low levels, making it easier for people to borrow money to buy a home. This has helped to drive demand for housing and contributed to the strong growth that the market experienced in recent years.
However, those low-interest rates are now coming to an end. The RBA has indicated that it will gradually start to increase interest rates over the coming years, which means that the cost of borrowing money is likely to go up. This could have a significant impact on the housing market, as it will make it more expensive for people to repay their home loans.
For those who have taken out a fixed-rate mortgage, the impact of the interest rate increases may not be immediately felt. However, once their fixed-rate period ends, they will be faced with the prospect of higher repayments on their home loans. This could make it more difficult for them to manage their finances and could even put some people at risk of defaulting on their loans.
A new analysis from Canstar shows that the average variable rate on offer by the big banks is 5.95 percent, well up on the 2 to 3 percent rates on offer during the pandemic.
Buyers who are faced with rolling onto a higher rate at the end of their fixed-term period would typically look to refinance to a lower rate, but falling property values and rising interest rates meant that may no longer be a viable option, explained Canstar money expert Effie Zahos.
“If the price of your property has fallen and pushed your loan-to-valuation ratio above the 80 percent mark, you could find that when you go to refinance to secure a lower rate you won’t be able to without having to pay costly lenders' mortgage insurance,” Ms. Zahos said.
“This is an expense that no borrower wants to incur at the best of times, let alone when living costs are steep and interest rates are still rising.”
Ms. Zahos said that more households could find themselves in a “mortgage prison” given falling house prices and higher rates.
The RBA announced its seventh cash rate rise in a row earlier this week.
CoreLogic research director Tim Lawless said that a predicted rush to refinance in early 2023 represented one of the largest future risks for property values.
“Another risk factor, of course, comes back to refinancing for fixed mortgage rate holders, we’ll start to see a lot more of that through about April to May of next year, and then onwards,” he said.
“And they’ll be refinancing from say a 2 percent mortgage rate, they’re now up to something that’s probably around the mid five [percent interest] if not closer to six [percent interest range].
“So there is a little bit of risk around how households navigate that, that refinancing cliff ahead of us as well,” he added.
Borrowers wishing to refinance may face some difficult decisions. BuyersBuyers CEO Doron Peleg said that strengthened lending rules introduced in 2021 would further restrict buyers’ options.
Mr. Peleg said, “many existing borrowers are going to be trapped in a mortgage prison being unable to refinance due to the increased lending assessment buffers in place since October 2021.”
“If a mortgage rate resets from 2 percent to a rate or around 6 percent, for example, borrowers will naturally be minded to shop around for the best possible mortgage rate or product to cushion the blow”.
“Unfortunately under the present lending conditions, many do not have the choice of refinancing due to tighter lending rules.”
For those who have taken out a variable-rate mortgage, the impact of the interest rate increases will be more immediate. As the RBA raises interest rates, the cost of their home loan repayments will increase, which could put a strain on their finances. It's important for these borrowers to monitor the interest rate environment closely and to be prepared for the possibility of higher repayments in the future.
Overall, the end of the era of low-interest rates is likely to have a significant impact on the Australian housing market. While it's impossible to predict exactly how the market will respond, it's clear that higher interest rates will make it more expensive for people to borrow money to buy a home, which could slow the pace of growth in the market and make it more challenging for some people to afford a home.
For help, always consult with your financial advisor, accountant, or finance company to strive for the best deal possible.