- Ryan Gair, CEO of Rate Money, has offered solutions for challenges borrowers are expected to face in 2023
- Australians will have less purchasing power, and some recent borrowers are likely to be in a mortgage prison
- Borrowers are at risk of bad credit history if repayments are missed - impacting their ability to refinance
With an environment of rising interest rates, banks tightening their lending, and likely a slowdown in the local and global economy, Australians who are looking to get a home loan in 2023 will face a range of hurdles.
In light of this, mortgage expert Ryan Gair, CEO of Rate Money, has shared what he believes are the five challenges borrowers will face in 2023, and what solutions there are to overcome them.
“Between interest rate rises and inflation, households are in for a tough year ahead – particularly homeowners who might be trapped in a mortgage prison due to lack of equity in their property and those just coming off fixed-rate loans who will see their repayments double,” he said.
“We’ll see first home buyers who tried to outbid investors reach their absolute limit with loan repayments and likely face mortgage stress. Among the self-employed, cash flow will be one of their biggest challenges, particularly when paired with rising interest rates.”
Ryan Gair, CEO of Rate Money
Mr Gair said his biggest advice for homeowners is to pay down 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.”
5 challenges mortgage holders will face in 2023 – and how to overcome them
- Australians will have less borrowing power
- Homeowners could be trapped in mortgage prison
- Fixed-rate interest mortgagors will see repayments double
- Risk of bad credit history if repayments are missed.
- Self-employed will face cash flow issues
1. Australian will have less borrowing power
Mr Gair noted that as recently as six months ago, if a home loan had a 2% interest rate, banks would asses borrowing power based on a 5% rate, usually 3% higher than your approved rate. With interest rates now around 5%, this would increase the buffer to 8%.
“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 said.
Mr Gair suggested that borrowers who can consolidate all their personal debts, such as car loans and credit cards, into one repayment under their mortgage should do so.
“For example, if you have a car loan at 8 per cent interest over five years, rolling this into your mortgage will see the repayments be spread across a 30-year loan at 5 per cent interest instead. However, it’s important borrowers try to pay this back as quickly as possible and not end up accumulating more debt,” he said.
2. Homeowners could be trapped in mortgage prison
With the property market falling, so too has the value of people’s homes. This may result new homeowners with heavily leveraged houses potentially ‘trapped’ and in negative equity.
While those with more than 20% equity can refinance, those without much or no equity could be stuck on a high-interest rate with their existing lender or risk-paying lenders mortgage insurance.
“If you’re in this situation, call your bank and say you’ve found a better rate with another lender, but you would like to remain with them and negotiate a better deal. The majority will come to the party and give you a better rate so they can keep you as a customer,” said Mr Gair
3. Fixed-rate interest mortgagors will see repayments double
Homeowners coming off the pandemic-induced ultra-low fixed rate mortgages will soon face a significant rate rise, with variable loans now sitting at 5-6%. This is more than double the 2-2.5% rates seen during the first tow years of the pandemic.
For borrowers with more than 20% equity but may be struggling with repayments or have cash flow issues, Mr Gair suggested to putt their mortgage in interest-only repayments while rates are high.
“There are certain lenders who offer this, so speak to a home loan provider like Rate Money who can guide and advise you on this option. Moving to interest only will allow you to reduce your monthly repayments for a short term and free up cash flow.”
4. Risk of bad credit history if repayments are missed
As interest rates continue to rise, homeowners that struggle to make ends meet and miss payments may record bad credit. Even if borrowers catch up, lenders expect at least six months of clear credit history – without it, you are unlikely to refinance.
“Get on the front foot and contact your lender as soon as possible if you think you may miss a loan repayment and request that it not be marked against your credit report,” he suggested.
“Banks and financial institutions want to work with you to find a solution, so ensure you keep a clear and open line of communication and return any calls or emails you may receive.”
5. Self-employed will face cash flow issues
During the start and end of the year it is common for the self-employed to face cash flow problems as businesses close down over the holiday period.
“In the building and construction industry, for instance, many subcontractors won’t have a source of income unless they have another job on the side,” Mr Gair noted.
He suggested to create as much cash flow as possible, self-employed homeowners should consider cutting back on spending and purchases, as lower cash flow could affect your mortgage payments personally.
