Whether you’re about to start your home buying journey, or you are considering refinancing, it’s important to understand what your best home loan rate options are for 2023.
There are several key areas affecting home loans and interest rates that homeowners will be wise to look into for 2023. This includes the ongoing cash rate hikes, the potential of fixed rate terms reverting to much higher rates, and ultimately which home loan is the best option for your goals.
Up or down, left or right, it’s hard for everyday Australians to keep track of the current interest rate environment, let alone what your mortgage repayments could look like in a year. So, let’s explore what first home buyers and homeowners should look for in a mortgage in 2023, and the best home loan rates and options available to them that may be worth considering.
Home loan rate predictions for 2023
Interest rates might keep rising
First and foremost, you may be wondering if interest rates will rise again next year. After eight Reserve Bank of Australia-led cash rate hikes in a row, economists have predicted that the central bank is not yet done increasing mortgage rates.
“The Board expects to increase interest rates further over the period ahead, but it is not on a pre-set course. It is closely monitoring the global economy, household spending and wage and price-setting behaviour,” said Governor Lowe.
It is clear that 2023 will be starting on a very different note for interest rates than in 2022. In fact, in January 2022 the Reserve Bank (RBA)’s average ongoing interest rate on outstanding loans was 2.94%. The latest RBA data shows this rate is now 5.09% as of October 2022. This is a rate increase of 215 basis points, but for homeowners can represent hundreds of dollars more a month on their mortgage repayments.
These interest rate hikes have largely been driven by the ongoing cost-of-living crisis. Inflation is currently at levels not seen since the 1990s, with the monthly Consumer Price Index (CPI) indicator rising 6.9% in the year to October 2022, according to the latest data from the Australian Bureau of Statistics (ABS). The RBA has indicated its target range for inflation is 2-3%, meaning that we still have a ways to go until inflation is back under control.
Unfortunately, more cash rate hikes are expected in 2023. For homeowners that have been juggling higher mortgage repayments, it may be worthwhile considering a refinance to a lower-rate option to give yourself a rate cut. For 2023, your best home loan rate may simply be one that offers you a much-needed rate reduction and some relief in your budget.
For first time buyers trying to get a foot on the property ladder, higher interest rates could lower their borrowing power. Consider using a Borrowing Power Calculator before you apply for your first home loan to ensure you know what loan amount you could afford to borrow.
Fixed rate customers in for a shock
For the many homeowners that locked in an interest rate prior to the cash rate hikes in 2022, it may be worth buying a lottery ticket for all your good luck. After that, it’s important to make a clear note in your calendar of when your fixed rate term will end. If it is set to end in 2023, you may find that your mortgage repayments revert to a higher standard variable rate than you were previously paying. All the good luck you’ve had avoiding higher interest rates could come to an end – and leave a serious sting in your wallet.
It’s also worth keeping in mind that many homeowners were able to lock in interest rates below 2% prior to 2022. These homeowners could see the most significant jump in their mortgage rates if they stay complacent.
Using the above example from RBA data, if you fixed your 25-year, $500,000 home loan rate at 2.94% last year, your monthly repayments would be $2,355. If when your hypothetical fixed period ends and your interest rate jumps to 5.09%, your repayments would become $2,949. This would be a monthly mortgage repayment increase of $594 – or the equivalent of buying a new set of tyres each month.
Difference in repayments during and post-fixed rate: 25-year, $500,000 loan
|Home loan on a lower fixed rate
|Home loan after fixed rate period ends
Source: RBA Lenders Interest Rates, average ongoing rates January 2022 vs October 2022.
Note: Hypothetical example based on repayments on 25-year, $500,000 home loan where borrower was fixed at 2.94%, and after fixed term ended it reverted to 5.09%. Does not factor in fees.
Some are calling this fixed rate customer increase in repayments the ‘mortgage cliff’. Put simply, it means that fixed rate mortgage holders face a potential sharp interest rate hike, and jump in home loan repayments, when they roll off their fixed rate deals in 2023. For current fixed rate customers, your best home loan rates for 2023 may be those that make the jump between their old rate and new rate less severe.
Keep in mind that if you took out a home loan very recently and have not built up a lot of equity, or your property value has decreased, you may find it difficult to meet the refinancing eligibility of a new lender. If your loan-to-value ratio (LVR) has dropped below 90%, for example, due to a dip in the market where you bought, you may not gain approval for your new loan application.
What are your best home loan rate options for 2023?
It’s important to note that there is no one best home loan rate in Australia. The ideal home loan for one person may not suit another, as every borrower’s needs and goals are different. Also, there is more to a home loan than the interest rate charged, and it’s crucial you compare factors like the comparison rate, fees (such as annual fees), features offered (such as making extra repayments), and much more.
With the above key predictions in mind, it’s important to ensure you are choosing the best home loan for your specific financial situation. The three main home loan interest rate options are variable rates, fixed rates and split rates (a mix of these two).
Let’s explore the different types of home loan rates and which one may best suit different borrower types in 2023.
Variable rate benefits in 2023
Variable rate home loans move with market conditions, meaning that if the RBA hikes the cash rate, your interest rate will move accordingly – assuming your lender passes this increase on. However, if the RBA cuts the cash rate, your repayments will get a much-needed decrease as well. Over a 20-30-year home loan term, it is expected that your interest rate will fluctuate.
For 2023, if expert predictions are accurate, the cash rate may continue to increase at least until inflation levels come down. However, what goes up must come down, and once high inflation levels are brought under control, homeowners could see cuts to the cash rate again.
It is impossible to predict when this may happen without a crystal ball. However, some expect interest rates to fall again late 2023 or early 2024.
If you’re looking to nab your first home loan, or if you’re considering refinancing, note that a variable interest rate could provide you with immediate relief to your budget when a cash rate cut occurs.
Fixed rate benefits in 2023
If you are considering refixing in 2023, or starting your new home loan with a fixed rate, it’s worth keeping in mind that this will offer stability in your budgeting.
Knowing exactly how much your mortgage repayments will be next year, could provide you with the ability to forward plan and budget accordingly, as opposed to gambling with a variable rate. This could be especially useful if inflation continues to rise and cost-of-living pressures remain heavy on household budgets.
Generally speaking, in a rising rate environment fixed interest rates tend to trend higher than variable rates. That being said, if you do your research and find a competitive fixed rate that offers your budget stability, you may find fixed rates better suit your goals.
Split rate benefits in 2023
If you’re interested in a ‘best of both worlds’ option, it may be worth considering a split rate home loan.
As the name implies, a split rate home loan means you may divide your mortgage repayments between a variable rate and a fixed rate. It doesn’t have to be 50/50 either, but you can split 40/60, or 80/20 if you are so inclined. Either way, you may be able to secure a stable budget with a fixed rate and enjoy lower mortgage repayments if the cash rate does decrease.
Additionally, you may be able to take advantage of helpful features, such as an offset account, a redraw facility, or the ability to make additional repayments, which are typically reserved for variable rate home loans, while enjoying the perks of a fixed rate loan. These features can be put to good use in a higher-rate environment, helping to reduce the interest repayments on your mortgage.
Whichever option you determine is your best home loan rate choice for 2023, it’s always worthwhile comparing your options outside of your childhood bank. Reduce Home Loans offers some of the most competitive home loans for borrowers looking for a variable rate, a fixed rate or a mix of both. You can compare our award-winning range of home loans today.
For more information about Reduce Home Loans’ competitive home loans, or to speak to an expert for more information, please don’t hesitate to get in touch today.
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