2023 New Year’s Resolution for mortgage borrowers & refinancers

Challenges await home loan borrowers and would-be homebuyers in 2023 as the rate hike cycle continues, but certain strategies can help ensure they are well-equipped to brave the uncertainties.

Your Mortgage reached out to three home loan experts to know their insights about the home loan market in 2023 and some new year’s resolutions borrowers and would-be first home buyers can adopt in three areas: applying for a home loan, saving a deposit, and refinancing.

Applying for a home loan

Zippy Financial director Louisa Sanghera believes the hike cycle is close to its end, however, there remain key considerations borrowers must take when applying for home loans.

“It’s vital to reduce any personal loan or credit card debt as this can have a significant impact on your borrowing capacity,” she told Your Mortgage.

At this time when further hikes are expected, it would also be wise in the current fixed interest rates on offer.

“I believe that these are far above the rate reality over the medium-term,” Ms Sanghera said.

Borrowers must always remember that banks tend to be more cautious with lending as property prices soften amid a downturn.

“This means we are starting to see much more conservative bank valuations for property purchases, which can result in finance not being approved in some instances,” she said.

Ms Sanghera shared some New Year’s resolutions homebuyers and first-time borrowers can adapt as they enter 2023:

• Ensure you understand your borrowing capacity before you start your property hunt.

• Make sure all of your paperwork is ready to go

• Be realistic with the purchase price points for your next home or investment property

• Try not to worry about current market or interest rate conditions because property should always be a long-term investment decision

• Do not get caught up in so much ‘property research’ that you wind up with analysis paralysis and don’t buy a property when the time is right for you.

Saving for a deposit

Data from Lendi showed a 28% drop in median net surplus income since the beginning of 2022 while borrowing power shrank by 11% or around $100,000 amid the current hike cycle.

Meanwhile, the average loan size decreased 16%.

Aussie Home Loans CEO Brad Cramb said these sets of data indicate headwinds for borrowers saving for a deposit or planning to do so in the coming year.

“If home ownership is a goal for you in 2023, while the cost of living or economic climate might be tricky, it’s certainly not impossible, especially with the right advice,” he said.

Mr Cramb said it is about creating a workable and achievable budget that allows you to save for the home you want.

Here are some strategies borrowers can employ next year as they save for a deposit:

• Make sure to do monthly checks: at the start of each month, take 20 minutes to reassess your expenses, review upcoming events, and any potential costs.

• Be realistic and break this budget down by week so you know exactly where and what you’ll be spending your money on – what could you not do, and how much you can add to your savings.

• Look at your non-negotiables: Food, rent, transport, insurance, and paying off your credit card probably won’t change too much. Be realistic about other spending aspects, that for now, could take a back seat to achieve the property you want.  

Mr Cramb said it might be best to reach out to a mortgage expert or a broker, especially those who would like to enter the market with a deposit of less than the typical 20% requirement.

“It’s not impossible to get a home loan with less than 20% deposit. The only catch is that you will have to pay for the Lenders Mortgage Insurance,” he said.

A high loan-to-value ratio (LVR) means that the borrower owes a large amount of money compared to the amount they put down as a deposit.

LVRs higher than 80% often result in the lender charging LMI.

“This means it’s worth a chat with a mortgage expert as to if this scenario will pay off for you in the longer-term,” Mr Cramb said.

Refinancing mortgages

Two Red Shoes founder Rebecca Jarrett- Dalton said there would be a huge surge in refinancing enquiries next year as borrowers start to roll off the lower fixed rates taken during the pandemic.

“But unfortunately many who would want to refinance would not qualify for their existing loans due to the need for banks to factor their debt at 3% above today's interest rates, which are 3% above where interest rates were at that time,” she said.

These borrowers were tested at the current rates when they applied for the first time, so refinancing amid the current market conditions could be tough.

“We will therefore see a lot more repricing vs refinancing, renegotiating with existing lenders — which is already well in play,” Ms Jarret-Dalton said.

“Additionally borrowers are abandoning the offset style loans in favour of lower rate basic loans with no fees.”

Ms Jarret-Dalton said refinancing over the coming year would be best for borrowers who fit the following circumstances:

• Those who did not refinance recently and was not able to benefit from the current competition between lenders.

• Borrowers with higher income/lower debt

• Borrowers with built-up equity

“Those who will be challenged are single income families, borrowers with less equity, and those with unusual income sources,” she said.

The biggest advantage of refinancing in 2023 would be the savings derived from the current competitive climate between lenders.

Refinancers would also be able to restructure and consolidate loans for better cash flow.

They can also get cashback bonuses paid by lenders.

Below are Ms Jarret-Dalton’s dos and don’ts for refinancers in the coming year:

• Do ask friends and family to recommend a trusted broker, we sit above all of the policies of all of the lenders so we can confirm who you would or would not qualify with before you start making applications

• Do consider the cost versus the potential savings.

• Do get your house in order financially to make you a better prospect for refinancing.

• Don’t consolidate consumer debt into a 30-year loan term with no plan to pay it off sooner unless it’s necessary to do so.

• Don’t necessarily refinance just to chase cashback offers – the old adage is there is no free lunch.