What a difference a year can make.
Back in November 2021, the cash rate was at a historic low of 0.10% and APRA, the banking regulator, had just increased the serviceability buffer at which banks stress test mortgages from 2.5 percentage points to 3 percentage points to curb “risky” lending.
But fast forward 12 months, and the picture is very different.
The cash rate is now at 2.85% following seven consecutive months of hikes from the Reserve Bank of Australia, which has seen it rise at the fastest pace since 1994. Most lenders have passed on the RBA rate rises in full to their variable-rate customers.
As a result, the average borrower with a $500,000 loan with 25 years remaining has had to stump up an extra $760 more in home loan repayments in November than they did in April, according to RateCity calculations.
Fortunately, the story doesn’t end there.
That’s because many Australian homeowners haven’t taken these rate hikes lying down; rather, they’ve refinanced onto more competitive deals to save thousands of dollars over the life of their loan.
Australia’s refinancing rush
More than one million Australians refinanced their home loan in the 12 months to September, saving an estimated $1,524 per year on average, according to PEXA’s Refinancer Sentiment Research Report.
The top three reasons given for refinancing were:
- Wanting a more competitive interest rate
- Needing to save money
- Broker recommendations
What’s more, another 2.28 million Australians (31.2% of mortgage holders) are considering refinancing in the next two years which, given the tightening lending environment, shouldn’t be that surprising.
PEXA’s head of research, Mike Gill, said Australian homeowners were hunting out the most competitive interest rates, leading to record high levels of refinancing.
More rate hikes are on the horizon
The RBA has been lifting the cash rate to bring annual inflation – currently at 7.3% – back to its target range of between 2-3%.
However, inflation is likely to get worse before it gets better, with the central bank forecasting it to peak at around 8% later this year, before it declines next year.
With the RBA “resolute in its determination to return inflation to target”, more rate rises in the months ahead are all but guaranteed.
Refinancing your home loan (if your financial circumstances allow) can help you get ahead of these rate rises.
But you’ll need to act fast if you don’t want to get trapped on an uncompetitive rate.
That’s because, as a general rule, each time the RBA raises the cash rate by 50 basis points, the average homeowner’s borrowing capacity drops by about 5%.
In part, this is due to you having to find room in your budget to pay more interest. But it’s also because of APRA’s 3-percentage-point serviceability test, which, naturally, gets harder to pass with each subsequent rate hike.
So if you wait too long to switch to a lower rate, you may find you don’t meet the new serviceability requirement.
Don’t want to get stuck on an uncompetitive rate? Just Imagine Finance can help you refinance. Contact Catherine on 0414 673 359 or catherine@justimaginefinance.com.au
