The year 2023 will be challenging to navigate amidst rising interest rates and stricter lending conditions. Here are the six biggest hindrances for borrowers this year, with possible solutions.
1. Lower Borrowing Capacity
Amidst rising interest rates, borrowers will be assessed at a higher buffer rate. The variable interest rate is now at around 4.46%, and most lenders will assess serviceability at least 3 percentage points higher than the current interest rate. This means potential homebuyers will be able to borrow less, lowering the amount they can afford to pay for a home.
Personal loans, like credit-card accounts and car loans, lower your borrowing capacity; consider consolidating all your debts into one repayment as part of your mortgage. This will allow you to pay a lower interest rate on most of your debt.
2. Rise In Repayments For Fixed-Rate Borrowers
Many homeowners secured fixed terms with very low rates during the pandemic’s peak, and two-thirds of those terms will expire in 2023. Variable rates are now around 5% to 6%, which is more than twice what they were for many at the height of the pandemic. This will cause a massive increase in repayments for many borrowers whose fixed-rate term ends.
Prepare for the end of a fixed-rate term by figuring out what to do next. You need to review your budget and cut down on unnecessary spending. Making extra income from a side business or a second job could be helpful.
Switching to an interest-only loan option for a couple of years might be a good idea. It would lower your monthly repayments and help you manage your expenses. But you wouldn’t be building equity during this time. Refinancing upon the end of your fixed-rate term is another option.
Our brokers can help you assess your situation and help you reach a solution best suited to your needs. Call us at 1300 889 743 or complete our free online assessment form today.
3. Being Trapped In A ‘Mortgage Prison’
Homeowners with more than 20% equity can refinance, but those with less equity than this might find negotiating a different mortgage term challenging.
Declining home values and rising interest rates make this even more likely, increasing the chances that homeowners might fall into a mortgage prison – where they are unable to refinance.
Try to lower your expenses by making a budget and sticking to it. Consider decreasing your credit-card limit to reduce the temptation to overspend. We have lenders on our panel that can help you with your situation if your borrowing capacity is very low and we can help you find ways to improve your borrowing power. We will help you find a lender that suits your needs better and present you as a promising borrower.
4. High Risk Of Defaulting On Home Loan
The rate hikes will hurt borrowers with higher debt-to-income ratios and those unprepared for higher interest rates. The borrower might fall behind on repayments and even default on their mortgage.
Failing to repay on time will put a dent in their credit history and affect their ability to refinance in the future.
If you are struggling to keep up with your repayments, talk to us or your bank immediately to explore options. We can talk to your lender on your behalf to arrange a few financial hardship options best suited for you.
5. Cashflow Issues Over Holiday Season
Self-employed homebuyers and business owners might face cashflow problems during the holidays as businesses close. It might become a hindrance to paying monthly repayments if not planned for in advance.
Consider cutting back on your expenses and planning for less income during the holiday season and the first few weeks of the new year to ensure you can continue to make your mortgage repayments. Your financial situation will change over the life of the loan, so keep a close eye on your budget. Set aside buffer funds for emergency expenses.
6. Increasing Likelihood of Mortgage Stress
If you have not missed any repayments and don’t have any mortgage arrears yet but are finding it difficult to make repayments on time, then you are considered to be under mortgage stress. Frequent cash rate rises are increasing interest rates and repayments, and rising inflation is increasing the cost of living, but wages have remained stagnant. All these factors are responsible for causing mortgage stress to many homeowners, and this is likely to increase in 2023.
You need to find ways to increase your income or decrease your repayments to cope with mortgage stress. Some ways to manage mortgage stress include cutting down on your expenses, consolidating your debts into your home loan, and refinancing your home loan to a lower rate. Switching to interest-only repayments is a good alternative for the time being, but it might increase the total cost of your loan. Consider getting a second job to increase your income, too.
Get Help From Our Experts
If you are dealing with mortgage stress, talk to our expert brokers to help you avoid any defaults or arrears on your home loan. We will help you explore different strategies. Stay informed and plan your next step with Home Loan Experts. Call us on 1300 889 743 or complete our free online assessment form today!