Mortgage refinancing a make-or-break issue for many buyers

Mortgage refinancing is a pivotal issue for buyers trying to secure a coveted property in today’s competitive real estate market.

And the nuts-and-bolts business of obtaining the right interest rate and opting for fixed-rate mortgages, which have lower rates than variable-rate mortgages, or a split variable-fixed loan, is only likely to become more important in the coming months.

That’s because lenders are cutting their variable mortgage interest rates as they compete for a larger share of the record number of people who are refinancing their loans. At the same time, homeowners and prospective buyers look set to face stricter lending standards within months, potentially making refinancing an urgent issue for many people. 

The Australian Prudential Regulation Authority (APRA) says it will detail how it may intervene in the residential real estate market over the next couple of months. This intervention could include limits on how much buyers can borrow from the banks.

Since the start of the COVID pandemic, the main battlefield for lenders has been fixed rates, as many of those refinancing opted to lock in record-low rates as insurance against higher variable mortgage rates down the track.

But longer-term fixed rates are now rising, while variable mortgage interest rates are becoming more competitive.

In September, the Reserve Bank of Australia (RBA) opted to keep the cash rate at the low 0.10 per cent for the tenth month running. Extended lockdowns in New South Wales and Victoria, and uncertainty over their impact on the economic recovery, has also prompted the RBA Governor Philip Lowe to assure Australians that rates will remain very low until at least 2024.

In this environment, it makes sense for borrowers to explore all their loan options on a regular basis.

Nelson Alexander Director Arch Staver says buyers who ask their lender for a better deal or review their loan options through a mortgage broker are often pleasantly surprised at the money they can save.

According to Mr Staver, Melbourne buyers are competing in a supply-constrained market in which a cheaper finance deal can make all the difference in securing a new home.  

“It is almost a perfect storm,” he says.

“People have more savings than they have ever had. They have fewer places where to spend that money because overseas travel is restricted, and money is so cheap – and is going to remain so until 2024, according to the RBA.” 

With record numbers of homeowners now locked into fixed-rate mortgages, lenders are shifting their sights to variable rates, according to research by the loan comparison service, RateCity.

RateCity figures show the number of variable-rate mortgages under 2 per cent listed on its database has increased from 30 to 46 in the past two months.

The lowest on the list is 1.77 per cent, compared to the lowest three-year fixed rate of 1.85 per cent. The lowest four and five year fixed rates are more than 2 per cent.

Australian Bureau of Statistics figures shows refinancing hit a record high in July, with $17.22 billion worth of mortgages refinanced for the month, including by property investors, in seasonally adjusted terms.

While APRA has flagged its intention to introduce new curbs on lending over a staggered period, most economists think the financial regulator will take a “softly-softly” approach until the 2022 Federal Election, expected by March.

APRA can impose so-called macroprudential rules on banks, such as limits on types of lending or by introducing tighter income-to-loan ratios.

Interest rates on longer-term fixed rates, such as four and five years, have been rising since March.

However, RateCity figures show there are still plenty of fixed-rate mortgages available – at least among those with terms of up to three years – with rates of less than 2 per cent.

RBA data shows the average new variable rate in July was 2.72 per cent, while the average new fixed rate for mortgages with terms of between 1 and 3 years was 1.98 per cent – a difference of 0.74 percentage points.

This shows that variable rates, on average, are still relatively high, as competition between lenders has been so focused on fixed rates.

There are many reasons why refinancing is surging. During the pandemic, people have focused on their finances more, including trying to save on mortgage costs.

Another likely contributor is the temptation of “cash-back” offers by lenders of up to $5000 to persuade those refinancing their mortgages to switch to them.

An increasing number of borrowers are fixing interest on half of the loan. This is partly because it is usually only the variable portion that carries a quality mortgage offset account – and an offset account can save people a fortune in interest.

Nelson Alexander can provide you with referrals to qualified mortgage brokers. Please contact any of our offices for more information. 

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