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Refinancing burst takes off as rates rise

More Australians are refinancing their home loans at greater rates and for larger amounts on the back of rising interest rates, new data shows.

PEXA’S Refinance Index for the week ending December 6 hit 177.9 points, which was 0.4 per cent up on the previous week and 8.1 per cent on the same week year-on-year.

In September, the Index reached a peak of 179.5 points.

PEXA Chief Economist Julie Toth said the Reserve Bank of Australia’s decision to raise the cash rate 300 basis points in just eight months, was the highest level since 2012.

“This is the largest and fastest rate rise ever implemented by the RBA,” she said.

“The relatively direct transmission of interest rate rises to mortgagees will continue to take ever larger chunks of disposable income away from mortgage-bearing households into 2023.

“Looking ahead, the RBA continues to flag the possibility of further rate rises in the new year in order to tame excessive domestic demand in our resource-constrained economy. 

“We note further rises are not yet a fait accompli, as globally the latest monthly indicators of inflation in the US showed some very welcome hints of levelling out. 

“Locally, we are not seeing evidence of a prices-and-wages inflation spiral, which would necessitate further tightening.”

Ms Toth said rising interest rates were driving record numbers of borrowers to refinance their loans.

“Our consumer research confirms a strong appetite for Australians to shop around for the best loans possible,” she said.

“This is warranted, given that consumers can save an estimated $1,524 per year on average by seeking out new financing options. 

“This is in addition to cash-backs and other incentives being offered to refinancers by major home loan providers.”

Ms Toth said renters looking to break into home ownership were watching as their maximum loan size was becoming progressively smaller, despite local house price falls.

“We are now seeing fewer people moving from renters to first-homeowners, and at lower average price points,” she said.

“This places further pressure on rental markets, at a time when rental availability and affordability are at record lows in many locations.

Australian home loan marketplace Joust.com.au, has also seen an increase in the size of home loans accessed for the purpose of refinancing on its platform.

Data from the platform’s live auction service showed a 6.15 per cent increase in the size of loans accessed nationwide in its ‘refinance’ category in October.

The average loan has risen from $508,838 to $540,149 in 12 months.

Joust Chief Executive Officer Carl Hammerschmidt said there were clear signs  many borrowers were initially unprepared for this year’s rapid rate hikes. 

“The increase in people  across most states looking to refinance larger home loans shows that those who got into the market during record low interest rates are now finding themselves over-extended,” he said.

“So while loan sizes for the purpose of buying and building fall, we’ve seen people with larger loans looking on Joust for a better deal as not only mortgage repayments spike, but so do things like groceries, petrols and other day-to-day expenses.”

Comparing data across Australian states, loan sizes for refinancing accessed through Joust saw the biggest jump in South Australia, where there was a significant 40.70 per cent increase in October 2022 in comparison to the same month in 2021. 

This was followed by the ACT which saw a 20.82 per cent increase in loan size, while NSW had a 13 per cent increase. 

Over the same period loan sizes for the purpose of refinancing in Victoria dropped 1.12 per cent, while in Queensland they fell 7.2 per cent.

“These trends are expected to continue into the new year,” Mr Hammerschmidt said.

“With many economists predicting rates are likely to reach the mid three per cent range by early 2023, what’s important for all mortgage holders to keep in mind at the moment is that it’s not too late to find a better deal. 

“The positive side of rising rates is that lenders are being forced to compete for not only new business but to keep existing business as well, it’s important to look at your refinancing options as soon as you can.”

RateCity.com.au data shows that someone with a $500,000 debt today, with 25 years remaining on their loan, refinanced their loan from the average variable rate to one of the lowest in the market they could save up to $19,451 in the next three years.

Someone with a $1 million loan refinancing from the average rate to one of the lowest could save an estimated $39,844 in the next three years.

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RateCity Research Director Sally Tindall said home owners should shop around for a better deal on their home loan.

“One of the most effective ways to inject ongoing relief into your budget is to refinance to a lower-rate lender,” she said.

“Switching banks might seem as appealing as sticking pins in your eyes. However, with many lenders now offering applications in less than an hour, it should leave people time to apply and still get to the beach.

“If you can’t make the budget stack up, call your bank well before you miss a repayment to see what options you have. Also spend some time getting independent financial advice.”

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