Sydney’s Mortgage Refinancing: Enhancing Profit Potential

Sydney’s Mortgage Refinancing: Enhancing Profit Potential – Up to 880,000 Australian households will need to find hundreds, or even thousands, of dollars more each month when their fixed rate periods expire this year and the rock-bottom interest rates they’ve enjoyed since the start of the pandemic become a thing of the past. Past.

Until now, borrowers have been insulated against rate hikes by the Reserve Bank of Australia that sent variable mortgage rates rocketing higher.

Sydney’s Mortgage Refinancing: Enhancing Profit Potential

Up to 880,000 households will have to fork out a lot more for their mortgages in the second half of the year when their fixed rate periods expire.

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Households servicing a $550,000 mortgage — the average size of a loan issued between 2020 and 2022 — will suffer an $891 increase in monthly repayments, with highly indebted households on the hook for an even larger increase. Someone with a $1 million mortgage would have to fork out an extra $1,620 each month.

The “fixed rate mortgage cliff”, as it is known, is one of the big challenges for the Australian economy this year, and how the households cope will be crucial to the country can avoid a sharp downturn.

At the height of the pandemic, interest rates fell to record lows as the RBA tried to support the economy amid forecasts of a once-in-a-generation recession.

As part of its policy response, the RBA provided banks with access to cheap three-year credit, which they then lent to borrowers in the form of ultra-cheap, fixed home loans.

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Low rates led to an explosion of fixed rate borrowing and refinancing, with many households locking in their rates for two to three years.

Some borrowers entering the property market also took comfort from assurances by RBA governor Philip Lowe that interest rates are unlikely to increase until 2024. The governor has since apologized for the guidance.

At their cheapest point in May 2021, the average new fixed-rate loan for a term of three years or less was 1.95 per cent, compared with a new loan of 2.8 per cent, RBA data.

As a result, borrowers took a gamble that interest rates are not likely to fall further by locking in the lower rate, and by mid-2021 about 45 percent of new loans that were written were fixed, compared to only 5 percent today.

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Over the course of 2020 and 2021, Australian banks lent $394 billion to Australian borrowers in fixed mortgage commitments.

Fast-forward to 2023, and 880,000 fixed loans written to rock-bottom interest rates are set to switch to much higher variable rates.

According to the RBA, about $350 billion – or half of all fixed rate credit – mortgages will expire this year. This is what is sometimes referred to as the “mortgage cliff”.

The remaining 38 percent of fixed rate credit, which includes about 450,000 loan facilities, will expire in 2024 and beyond.

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The pain will be most acutely felt between now and September, when a third of fixed-term credit will expire, and affected households will be forced to absorb the 350 basis point increase in the cash rate over the past year.

Just how much extra households will need to fork out will depend on what their fixed rate was and whether they roll off on a competitive variable rate.

But regardless of the scenario, they are looking at a 3 percentage point to 4 percentage point increase in their home loan rate, while borrowers who took out mortgages greater than $615,000 will cap a monthly repayment increase of more than $1000, assuming The entire loan is fixed.

A household with a $750,000 loan will have to find an extra $1215 per month – or $280 per week – when their loan switches to a variable rate.

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This assumes they have locked in a 2.48 percent interest rate for three years, which is the average, outstanding, fixed rate and refinance to a competitive 5.58 percent variable rate on maturity.

Borrowers who took out a $1 million mortgage – not uncommon for new borrowers in Sydney or Melbourne – will see a $1620 increase in their monthly repayments, or $374 a week, based on the assumptions.

Overall, the RBA estimates 90 percent of the fixed rate loans that roll off this year or next year will have to bear mortgage repayment increases of at least 30 percent.

After rolling off, about 25 percent of fixed rate borrowers will spend more than 30 percent of their income on their mortgage, the central bank says.

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Economists are divided on whether the looming, fixed-rate mortgage cliff will mark the beginning of a sharp economic slowdown or represent a blip on the radar.

That it expected an increase in home loan arrears in the period ahead as some borrowers struggle to meet higher repayments.

Westpac CEO Peter King warned in February that almost half of the bank’s $471 billion in outstanding home loans would likely breach their original serviceability assessments, which tested customers’ capacity to deal with a 3 percentage point rate rise.

The roll-off also comes as households are already under pressure. Consumer prices are increasing at their fastest pace since the early 1990s (although there are signs that price pressures have now peaked), while real wages are at their lowest level in a decade.

Mortgage & Debt Refinancing

Another cause for concern is evidence that fixed-rate borrowers have lower mortgage buffers because there are restrictions on their ability to prepay their loans.

The RBA estimates that two in five borrowers with small mortgage buffers (ie less than three months of payments) have fixed rates or are investors with loans in place before 2021.

The RBA says it is possible fixed-rate borrowers hold liquid savings elsewhere, meaning they are less vulnerable than they appear.

The household sector has also accumulated $300 billion in excess savings since the start of the pandemic, which should at least partially cushion the blow, although those savings mainly sit with wealthy, older households.

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Borrowers are also more likely to be in work than at any time in recent history, thanks to Australia’s stellar labor market and near 50-year low unemployment rate of 3.5 percent.

Fixed rate borrowers have also had more time than variable rate borrowers to restructure their household budget in anticipation of higher repayments, as well as time to build a savings buffer.

However, borrowers with split loans would have already experienced higher repayments on the variable portion of their mortgages. About 53 percent of NAB’s fixed rate customers have a split loan.

Westpac’s chief executive said there was a range of tools banks could use to nurse customers through hardship, including restructuring repayments and putting borrowers on interest-only loans.

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Banks are also experimenting with extended loan terms that make it easier for customers to repay loans as interest rates continue to rise, as well as to borrow more up front.

National Australia Bank subsidiary UBank said it would extend a 35-year mortgage previously only offered to new buyers to those looking to refinance. This would reduce monthly repayments, but end up costing customers much more over the life of the loan.

Banks must respond to a distress request within 21 days, while MoneySmart says borrowers should consider selling their home if their circumstances are unlikely to improve.

Michael Read Economic Correspondent Michael Reese is the Financial Review’s economic correspondent, reporting from the Federal Press Gallery in Parliament House. He was previously an economist at the Reserve Bank of Australia and at UBS. Connect with Michael on Twitter. Email Michael at michael.read@Home Loan refinancing can be a handy way for borrowers to manage a mortgage and stay within budget. With a refinanced home loan, it’s possible to save money over the length of your loan by getting access to lower interest rates and helpful features.

Reasons People Choose To Refinance Their Home Loans

Borrowers who feel like refinancing might be right for them may be wondering how often they can do it. In fact, some borrowers may question whether refinancing often is a good idea, or even allowed. To help answer that question, this handy little guide will explain the ins and outs of refinancing and give an idea about how often a borrower might want to refinance.

Basically, refinancing is the process of switching home loans by paying down an existing home loan and taking out a new home loan. Any equity that was built up from the deposit, regular repayments, and fluctuating property values ​​is taken into account when the new loan-to-value ratio is calculated for the new home loan. Borrowers who refinance with more equity can generally find that they have access to lower interest rates from lenders.

Sometimes, due to fluctuations in market price, a borrower can find their equity lower or higher. This is important because lenders usually require 20% equity for borrowers who want to refinance. Borrowers who refinance with equity lower than 20% will have to pay Lenders Mortgage Insurance (LMI).

Refinancing also has a number of benefits that borrowers can access when they open their new loan such as:

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Although, one thing to keep in mind when refinancing is that a borrower’s credit score can be affected, even though it is only temporary. This can affect a refinancer because lenders will run a credit

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