Refinancing While House Prices Fall

Interest rates are on the rise lately and house prices are headed in the other direction. Many are looking at refinancing as a potential route to save on their home loan. The risk is that a lot of homeowners are heading into ‘negative equity’ territory, meaning that they are left owing more than their house is currently worth.

House Prices are Falling. Should I be Worried about Refinancing?

It is true that house prices have dramatically declined this year^[1]. But it is also worth remembering that the property prices soared about 28.6% in the two years leading up to 2022^[2]. It is common experience that after a market boom, there is sure to come a drop, which should keep things in perspective. However it can often be unnerving being in the middle of such a fall in value when you are a homeowner, especially when you are not sure how low house prices will go.

How Am I Affected by a Housing Market Decline?

The main concern for homeowners during a decline in property prices is losing home equity, which is the part of your home that you have paid off and own (subtract your home loan balance from the value of your property, and you have worked out how much equity you have). What most do not take into account is that equity can fluctuate just as much as property prices can. This is where the risk of taking a large initial loan while the property market was doing well can make you feel trapped, if you find yourself in this situation. With interest rates on the rise^[3] and an equity dropping lower, a dip in equity is likely to happen and refinancing can be tricky in this case. This being said, finding a competitive home loan can happen, especially if you still have 20% equity in your home, proof of your assets, income and expenses, your documentation of your loans in order and a good repayment history. Even if you have less that 20% equity, you can still refinance, but you will need to face paying Lenders Mortgage Insurance.

What Happens if I Have Negative Equity?

As an example, say you bought your family home last year for $600,000, taking out a $570,000 home loan. With the property market declining, your mortgage balance is now at $560,000, but you have just had your property valued, which shows that your home is now worth $555,000. You may have paid off a good chunk of your home loan in the past year, but you now have negative equity, which is frustrating and stressful to say the least. In a case like this, you will not be able to refinance until your equity is back in positive territory. This can be achieved by either paying more off your mortgage, through bigger, extra or more frequent repayments; or you can work on increasing the value of your property, either through renovating, building new spaces such as a deck or a granny flat, or just improving and updating certain parts of your home. Take the time and do the proper research before you pour more money into your home, ensuring which is the most efficient and effective way to lift the value.

What if Refinancing is Not an Option?

Not being able to refinance due to your home equity (or lack of) can be discouraging, but it is not the end of the road. There are things you can do to take back some control over your equity and while you do so, you can focus on reducing your home loan. Chat to your mortgage broker to see if you can work out a better interest rate with your lender. Check in with your budget and see if you can get creative for ways to cut down your costs and even bring in some extra income. Speak to your financial adviser to work out what steps you can take to manage your loan well in the meantime, until your equity balances out and refinancing becomes a reality again. If you would like to discuss financial planning for your family or get support via expert financial planning strategies, please contact Certified Financial Planner Elliot Watson on 02 4038 1623 and start the conversation.

Disclaimer: Your full financial needs and requirements need to be assessed prior to any offer or acceptance of a loan product. Licensing Statement: Credit Representative 525053 is authorised under Australian Credit Licence 389328.

^[1] https://www.smh.com.au/money/investing/property-price-falls-may-be-bigger-than-expected-20220630-p5ay2n.html?cid=010507

^[2] https://www.afr.com/property/residential/sydney-house-price-fall-nudges-20-per-cent-by-2023-anz-20220616-p5au71

^[3] https://www.rba.gov.au/speeches/2022/sp-gov-2022-06-21.html?cid=010507

Disclaimer: The information provided in this fact sheet is not legal, taxation or financial planning advice. It has been prepared without considering your specific needs, objectives and personal financial situation. Before acting on this information, we recommend that you consider carefully if it is appropriate for your needs, objectives and personal financial situation. All loan products are subject to lender criteria and approval. Fees, terms and conditions apply. Your full financial needs and requirements need to be assessed prior to any offer or acceptance of a loan product. Licensing Statement: Watson Mortgages Pty Ltd Credit Representative 525053 is authorised under Australian Credit Licence 389328.