Life just got tougher for half of all variable rate borrowers

Australian borrowers are in a mad scramble to refinance their loans and for millions of variable mortgage customers, Friday (14 October) delivered a whole new level of urgency to their quest for more competitive loan terms.

More than half of Australia’s variable mortgage customers will see their rates rise by 0.25 percentage points from Friday as CBA, NAB, ANZ and Macquarie’s October RBA rate hikes take effect.

There is some breathing space and time for borrowers to look around, with most repayments taking between two and three months to increase. There is usually a delay between the rate rise and when customers receive notification from their bank. Banks then typically give customers between 20- and 30-days’ notice to prepare.

In total, variable rate borrowers have seen their rates rise by 2.50 percentage points since May, taking the average existing variable owner-occupier rate to an estimated 5.36 per cent.

Overstretched and stressed homeowners are responding the latest round of interest rate hikes by refinancing in record numbers.

The latest data from the Australian Bureau of Statistics revealed that $14 billion worth of home loans were refinanced with a new lender in August, an increase of 13 per cent over the month and 20 per cent over the year.

This includes a record 27,667 mortgagors who refinanced with a new lender in August 2022 – up from 23,642 a year earlier.

Aussies with a $500,000 mortgage are facing a cumulative $735 a month hit to their family budget. That means forking out around $8,820 more per year since the RBA cash rate rises started in May.

Graham Cooke, head of consumer research at comparison website Finder, said rapidly increasing interest rates had led to a lot of pressure for borrowers.

“Borrowers are scrambling to cut costs on their mortgage where they can.

“Repayment spikes are just too much to manage for millions of households causing a rush to refinance.”

Finder’s Consumer Sentiment Tracker revealed that in the last three months, a quarter of borrowers struggled to pay their home loan. 

Mr Cooke said many had taken on too much debt when interest rates were low.

“With at least one more rate rise predicted in the short term, the full impact of increasing rates is not expected to be felt until early next year.”

Bigger struggles for many

While mortgage repayments are a monthly struggle for many, tens of thousands of others are reliant on an ever-diminishing pool of social and affordable housing subsidised by the government.

The Australian Housing and Urban Research Institute (AHURI) on Thursday (13 October) released a peer-reviewed study into ways to increase supply of housing to those in need through greater private sector involvement.

Prior to the pandemic, around 3,000 social and affordable dwellings were being produced per year, against an estimated annual need of around 36,000 homes.

The six Sydney University, Curtin University and industry specialist authors of the report, Private sector involvement in social and affordable housing, concluded that to meet the forecast demand, it was clear government and the private sector needed to work together more closely.

“The ‘hybridity’ of the housing system is essential, whereby social and affordable housing is increasingly financed, developed and managed by a combination of government, community-based and market providers, and cross-sector partnerships; no one sector can address the need alone,” the report noted.

This study highlighted that a range of established and emerging affordable housing product types can be supported through collaboration with private not-for-profit and for-profit partners.

“These strategies include public private partnerships, mixed tenure developments, tax subsidies for affordable supply, home ownership schemes, build to rent and inclusionary planning mechanisms.

“They depend on different combinations of government subsidy, policy settings, and regulation, and are suitable for delivery across a variety of different development contexts.

Real Estate Institute of Australia President, Mr Hayden Groves, said the housing affordability crisis is largely the result of a failure to build sufficient homes in this country.

“While the Treasurer (Jim Chalmers) is busily consulting superannuation funds and banks on how to finance additional investment, it is unlikely this will result in a single new house being built,” Mr Groves said.

“You need to have local and state governments approving developments, setting standards and working with the building sector and estate agents who bring current market intelligence, involved in the process.”

AHURI said institutional investors they interviewed for the report had a very strong appetite for mixed tenure developments.

“The private sector has had long and varied involvement in providing subsidised, social and affordable housing in Australia, ranging from the provision of private rental accommodation to households receiving Commonwealth Rental Assistance through to partnerships in renewing social housing estates and the direct development of affordable homes.

“However, to date, the outcomes of these approaches have been mixed.

“A key limitation has been the failure to leverage a significant increase in social or affordable housing supply in Australia, largely due to the lack of capital funding or subsidy to underpin growth.”

A private sector interviewee told the researchers that the private sector could be enticed to relatively low-risk projects.

“What’s the appeal for investors to activate these sorts of projects? I think that a key factor is not only the social outcomes and impact that’s delivered, but also the fact that, this sort of investment can be considered as quite low risk, as compared to a normal market-based project, because of the demand/supply equation in relation to the shortage of affordable accommodation.

“Providing an integrated product to market to the different cohorts is a really nice risk mitigating factor for an investment product.

“We think that there’s plenty of capital out there that can be properly deployed into well-structured projects like this.”