Its no secret that if you’re refinancing in 2023 you are going to have a very different experience
Its no secret that if you’re refinancing in 2023 you are going to have a very different experience to what you would have in 2021 (or early ’22 for that matter) as the interest rate environment has made a wild turn from an official (RBA) cash rate of 0.1% to now sit at 4.1% - with the actual rate you pay somewhere between 1 and 3% above that, depending on your circumstances.
Aside from the obvious increase in costs, the other big change you will notice as a borrower is that in virtually all circumstances, the amount that the bank will lend you will also have changed – though while rates have gone up, that borrowing figure has definitely gone down.
You (likely) haven’t changed – so why this difference? This comes down to serviceability – literally your ability to service (pay back) the loan. As a broad example, say that an income of $75,000 allowed you to make repayments of $2000 per month. 18 months ago, that $2000 would have been mostly principal, with a smaller portion of interest. Today, the maths has flipped and the majority of that would go to interest alone, leaving you able to pay back less principal. If you can pay less principal over the same period, then you’ll be offered a lesser amount to borrow. Put simply – you’ll pay the bank more, to get less in return.
This impacts borrowers in two parts. One, for those that are trying to get into the market (or upgrade), your budget has been curtailed – which is a challenge when prices have lost little to no ground over the past 12 months (and in some cases have continued to grow). This can keep potential buyers renting longer, which in and of itself can make it harder to save.
Secondly, those that have existing mortgages can find themselves with less mobility between lenders. Banks might have been falling over each other to lend you $500,000 for your current home 2 years ago, but the same banks might only want to give you $400,000 today on refinance. Fewer options to refinance can leave you with little recourse if you are otherwise looking to claw back some of those interest rate rises – and with a full percentage point or more difference between lenders, that’s worth looking for.