You may have heard that the cost of living and interest rates are increasing. But what does this mean if you’re planning to refinance? Is refinancing the answer? We’ll discuss how rising interest rates may affect your refinancing application and what you can do about it.
With the rising cost of living and climbing interest rates, you may be looking to refinance your mortgage. Refinancing could be the difference.
Depending on your circumstances, it can be a great way to get a better interest rate on your loan.
Not to mention that if you need access to funds for an investment property or renovation, refinancing can allow you to cash out equity in your home to use for other purposes.
But, according to CoreLogic, 79.5% of house and unit market values were declining across Australia in late 2022. And this can affect refinancing outcomes, however this is now not the case as Australia, in most capital cities have now experienced a rebound. Now the main concern when refinancing your mortgage is the increase in interest rates.
We’ll walk you through just what the effects of interest rate rises can mean for refinancers and how you can take action now to get ahead of the curve.
Refinancing and your property’s value
Rising rates have contributed to declining property values in some areas around the country in 2022 but this has now stabilised and in most cases rebounded in the major cities.
For example, Sydney property prices declined 10% since they peaked in February 2022, according to a CoreLogic data report, and many economists believed they’d fall even further. We now know this was not to be the case.
And as a homeowner, property value can affect your equity.
That’s because equity is the difference between your property’s (market) value and your mortgage balance. And it’s a number that lenders pay attention to when assessing refinancing applications.
Refinancing when your equity increases may see your refinancing application have a greater chance of success.
You see, most lenders will typically require you to have 20% equity in your home to refinance, which essentially serves as a deposit.
According to this graph here, if you bought a house in Sydney (for example) between June 2021 and September 2022, property prices declined and you may not have had 20% equity in your home. The good news is since February 2023 property prices started to rebound across most major Australian cities.
If you don’t have 20% equity, you could still refinance by paying lenders mortgage insurance – but that would likely defeat the purpose of refinancing in the first place. It is most likely you will not need to worry if your property has increased in value like so many have.
And if you fall into negative equity – where your home’s value drops below your mortgage balance – then refinancing most likely won’t be on the cards at all and you’ll be stuck with your current lender.
So, if you’re interested in refinancing your loan to get a better rate, sooner may be better than later … depending on how your property value is fairing. Although interest rate rises have played a larger role in whether a borrower is able to refinance their home loan. The reason being that with every interest rate rise your borrowing capacity reduces. Cost of living also plays its part, as cost of living increases so does the household expenditure measure once again reducing your borrowing capacity due to a lenders living expense benchmark increasing to meet the HEM value.
Refinancing to cash-out equity
If you’re keen to unlock some equity – you’re not alone!
According to NAB research, seven in 10 mortgage holders recently cashed out equity while property prices were high and used the money to renovate, invest in property or shares, or boost their superannuation
So how does cashing out equity work?
Let’s say you bought an $800,000 house five years ago that is now worth $1 million.
And let’s also say you took out a $600,000 loan for that house, which you’ve managed to pay down to $500,000 (you little beauty!).
By refinancing that $500,000 loan into an $800,000 loan (banks will typically let you borrow up to 80% of a property’s market value), you can unlock $300,000 in equity.
However, if you delay a year or so, and national property prices decline 10% over this period, your house might only be valued at $900,000.
That would mean if you wanted to unlock 80% of your property’s market value, you could only refinance your $500,000 mortgage into a $720,000 loan – and therefore only unlock $220,000 in equity.
Get in touch
If you’ve been considering refinancing lately, contact us to find out more. Whether you’re looking to land a better rate or unlock equity in your home, we can help you with all the particulars.
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