20 suburbs where fixed-rate borrowers could save by refinancing

Australians who fixed their home loan interest rates when the cash rate was low may be at risk of ‘mortgage prison’ when their loans revert to higher variable rates, according to Reduce Home Loans. New research has revealed some of the locations where borrowers could potentially save money by refinancing.

Research commissioned by Reduce Home Loans has identified the top 20 suburbs where mortgage holders could potentially save money by refinancing, assuming that:

• In June 2019, buyers purchased a house at the suburb’s median house price at the time
• Borrowed 90% of the purchase price
• Took out a 3-year fixed loan at 3.84% (the average 3-year rate at the time)
• Reverted to a variable rate of 4.75% in June 2022
  
  

* Assumes borrowers have 27 years left on their mortgage and are refinancing from a 4.75% loan to a 3.00% loan.

Reduce Home Loans general manager, Josh Beitz, said that as rates keep increasing, borrowers can become ‘mortgage prisoners’ unable to escape spiralling interest rates:

"The interest rate gap between higher-rate and lower-rate loans is already large, and is likely to keep growing as interest rates keep increasing. So refinancing now could potentially add up to a saving of tens of thousands or even hundreds of thousands of dollars over the life of the loan. More importantly, it might make the difference to some people being able to keep their home or being forced to sell it in a depressed market."

Another potential ‘mortgage prison’ risk is that with property prices forecast to fall in response to higher interest rates, some borrowers who took advantage of ultra-low fixed rates may lack the necessary equity to refinance.

According to previous RateCity analysis, if someone bought a median priced house in Sydney at the end of 2021 with a 20 per cent deposit, fixed for two years, the amount of equity in their home could shrink to just 13 per cent at the end of 2023 leaving them with a loan-to-value ratio (LVR) of 87 per cent.

Buying the same house with a 10 per cent deposit under the same circumstances could leave a borrower with just 3 per cent equity in their home (LVR of 97 per cent) after two years, while buying with a 5 per cent deposit might end up in negative equity, with an LVR of 103 per cent.

RateCity research director, Sally Tindall, said that anyone who bought recently and overstretched themselves to do so should double check their financial position before they refinance.

“Families that haven’t had a decent pay rise in the last couple of years could find they no longer meet banks’ stricter serviceability tests, particularly if they bought when rates were low and borrowed as much as they possibly could,” she said.

“Borrowers who own less than 20 per cent of their property value when their fixed rate ends could find they’re forced into negotiating solely with their current lender, or risk having to pay lenders’ mortgage insurance.”

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