Borrowers to face 5 challenges this year: Rate Money

Australians looking to get a home loan in 2023 will experience hurdles or roadblocks they haven’t faced before, the CEO of home loan provider Rate Money has warned.

Ryan Gair, the CEO of the mortgage manager specialising in self-employed borrowers has flagged that while mortgage serviceability may be tighter this year, there are still solutions available to borrowers.

Noting an environment of rising interest rates, banks tightening their lending, and a looming economic downturn, Mr Gair suggested that there were five challenges borrowers will likely face this year.

Australians will have less borrowing power

With interest rates now sitting at 5 per cent, the home loan buffer is now much higher than it has been in recent years — at 7.5–8 per cent. 

Mr Gair commented: “We will see banks tighten their lending even further, even to those on higher incomes, and it will make it harder for borrowers to get a home loan.”

He recommended that borrowers could be looking to consolidate their personal debts, like car loans and credit cards, into one repayment under their mortgage, which would see them pay a lower interest rate. 

“For example, if [they] have a car loan at 8 per cent interest over five years, rolling this into [their] mortgage will see the repayments be spread across a 30-year loan at 5 per cent interest instead,” he said.

“However, it’s important borrowers try to pay this back as quickly as possible and not end up accumulating more debt.” 

Home owners could be trapped in ‘mortgage prison’

As property values continue to soften from the highs of 2021/early 2022, borrowers who entered the market with smaller deposits may find themselves ‘trapped’ in their mortgage if they find they now have a loan-to-value ratio over 80 per cent.

Mr Gair suggested that while those with more than 20 per cent equity in their property can refinance, those with a lack of equity may either find they have to pay a high-interest rate with their current lender or risk paying lenders mortgage insurance (LMI), which can cost between $15,000–$18,000.

He suggested that borrowers should be actively looking to negotiate with their lender and find a better deal.

“The majority will come to the party and give you a better rate so they can keep you as a customer,” he said. 

Fixed-rate interest mortgagors could see repayments double

After record proportions of borrowers took out a fixed rate loan in early 2022 to take up the extremely low-interest rates during emergency pandemic settings, borrowers rolling off these terms will find their repayments drastically increase.

With the greatest concentration of fixed loans due to expire in the second half of 2023, home owners could see their rates more than double, to around 5–6 per cent.

Mr Gair suggested that any struggling borrowers who have an LVR under 80 per cent may be able to move to interest-only repayments for the next two years while rates are high.

“Moving to interest only will allow you to reduce your monthly repayments for a short term and free up cash flow,” he said.

A rising risk of bad credit history

With the aforementioned changes to rates, the Rate Money CEO said that more home owners may miss mortgage repayments and enter arrears, which could impact their credit scores and put them into ‘bad credit’ territory.

As a solution, Mr Gair said home loan customers should “get on the front foot” if they think they may miss a loan repayment and contact their lender to find a solution.

For example, he noted that some lenders will want to work with their customers to help them if they are in financial difficulty and can put in place waivers that do not impact a credit history.

Self-employed borrowers will face cash flow issues

Following the summer holidays, many businesses will have closed their doors and seen cash flow drop substantially.

The Rate Money CEO said self-employed home owners should look to create as much cash flow as possible, by “cutting back on spending and purchases” in order to protect their rising mortgage repayments.

He concluded: “My biggest advice for homeowners is to pay down your mortgage principal and reduce debt as much as possible. 

“The more, and quicker, you can pay it down, the more equity you will have to draw from in tougher times. 

“Working with lenders who are agile and flexible, and experts who can guide you along the journey, will also help to alleviate stress and hardship.”

[Related: NAB economist warns of ‘the paradox of thrift’ impact]