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Refinancing could hit record highs in 2023 following further rate rises

By Julie Toth - Chief Economist • Feb 2023

Today the Reserve Bank of Australia (RBA) announced its ninth consecutive increase to the cash rate, raising the cash rate by a further 25 basis points (bp) and taking it from 0.1% last April to 3.35% today.

The largest and most rapid series of rate rises on record in Australia is being felt directly by all variable-rate home loan holders and by an increasing number of fixed-rate mortgage holders as they roll off their fixed-term tenures. As a result, PEXA’s Refinance Index of loan refinancing volumes continues to show strong levels of mortgage refinancing activity, after a seasonal lull in early January.

PEXA’s Refinance Index in the week ending 7 February 2023 was:

  • 172.5 points, down by 1.3% from the previous week in seasonally adjusted terms (but up by more than 25% in original unadjusted terms);
  • Up by 16% from the same week in 2022 (seasonally adjusted); and
  • Down by 5% from the record high of 182 points at the end of December 2023 (seasonally adjusted)

PEXA Chief Economist, Julie Toth, said: “The RBA’s decision today brings this current series of increases to the cash rate to 325 bp in less than a year, taking it to its highest level since 2012. This is the largest and fastest rate rise ever implemented by the RBA. The relatively direct transmission of interest rate rises to variable mortgage rates will continue to take ever larger chunks of income away from mortgage-bearing households through 2023. Refinancing and loan renegotiation activity is likely to remain elevated, as mortgagees seek to reduce their mortgage costs.

“We are also seeing a growing number of fixed-rate mortgage holders roll off their loans and into a very sudden and sharp increase in their mortgage costs. In total, the RBA estimates that a third of outstanding housing credit (by value) is currently mortgaged at a fixed rate (and fixed term), and that more than 800,000 fixed rate loans are due to expire during 2023. All of these loans will be reset at a higher cost.

“Among both variable-rate and fixed-rate mortgagees, these rate rises are disproportionately affecting middle-income suburban mortgage-holders who purchased their home (or an investment property) during the past three years of record-high housing prices and record-low interest rates. More recent mortgagees tend to have larger mortgages and higher mortgage costs relative to their incomes, compared to home-owners with older loans. With property prices receding from their recent record peaks in many suburbs, increasing numbers of mortgagees will face higher mortgage-to-valuation ratios on their home.

“This change in valuation ratios will materially affect the way in which affected mortgage-holders respond to rising rates, via mortgage refinancing or property resale. At its worst, this situation can push mortgage-holders into reluctant sales, negative equity, so-called ‘mortgage prison’, and/or financial stress.

“Looking ahead, the RBA continues to flag the possibility of further rate rises in 2023 in order to tame excessive discretionary demand in our resource-constrained economy, and to stamp out the possibility of higher inflationary expectations becoming entrenched.”

PEXA’s Property Insights Report and Mortgage Insights Report, out this week and next week respectively, will shed new light on recent trends in property transactions and refinancing as interest rates continue to shape the Australian property market.

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