Fastest rising interest rates drive record levels of refinancing – PEXA

And what the recent rate hike means for mortgagees and homebuyers

Fastest rising interest rates drive record levels of refinancing – PEXA


By Mina Martin

The largest and fastest interest rate rises implemented by the Reserve Bank since the current policy of inflation targeting commenced in early 1990s have driven the record levels of refinancing nationwide, PEXA’s Refinance Index showed.

This week, RBA hiked the OCR for the sixth consecutive month, lifting the cash rate by a further 25 basis points to 2.6% and taking the total rate rise this year to 250 bp in just six months.

“The speed of these rises – coupled with the relatively lengthy transmission of interest rate rises through the banking system – means that the full impact of this year’s sequence of rate rises has not yet been felt. It will likely set in from around Christmas,” said Julie Toth, PEXA chief economist. “This month’s rate rise was smaller than markets had expected, but the RBA’s accompanying statement continues to flag further rate rises ahead to tame inflation. Action to slow inflation is warranted but demands caution, since rate rises will also put the brakes on activity and employment more broadly.”

Looking ahead, Toth said inflation data will include rising petrol prices as the fuel excise is reinstated, followed by the impact of fiscal policy measures in the Federal Budget, which will be announced in late October.

“Budget measures that can ease the pressure on housing affordability and household living costs will be most welcome, as we rapidly approach Christmas and the summer holiday season,” she said.

According to a recent study by PEXA Insights, roughly 2.48 million of Australia’s nearly 8 million mortgage holders had refinanced their home loan in the past year and/or intended to refinance within the next two years. The speed of interest rate hikes in 2022 was reflected in 71% of mortgage refinancers saying they were feeling “anxious about rising rates.”

“PEXA’s research indicates that rising interest rates are driving record numbers of mortgagees to refinance their loans, with PEXA’s Refinance Index hovering near its record highs, at 178.9 points (seasonally adjusted) in the week ending 2 October 2022,” Toth said. “Our consumer research also confirms the strong appetite for Australians to shop around for the best deal possible – and this is warranted – given consumers can save an estimated $1,524 per year on average.” 

The latest OCR hike meant mortgage borrowers and homeowner hopefuls face higher repayments and a significantly smaller maximum loan size.

“Around 35% of Australian households are owner-occupied with a mortgage (ABS Census 2021),” Toth said. “For a typical housing mortgage balance of $500,000, today’s increase of 0.25% will add a further $1,250 in annual interest payments, or $100 per month. Once fully implemented by lenders, the cumulative cash rate increase of 2.5% so far this year will have added around $12,500 in annual interest payments, or $1,040 per month in additional interest payments to a typical loan balance of $500,000. Around 31% of households are renting (ABS Census 2021). For renters who aspire to break into homeownership, local house prices might be falling, but their maximum loan size will be significantly smaller.”

Even prior to the latest OCR hike, RBA calculated that a 225 bp lift in interest rates from May to August “will have reduced borrowers’ maximum loan size by around 20%.” This will inevitably lead to fewer people moving from renting to owning, and at lower average price points.

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