Navigating mortgage refinancing in a shifting interest rate landscape

Navigating mortgage refinancing in a shifting interest rate landscape

November 21, 2023 | by DiJones

The world of real estate has seen its fair share of twists and turns over the past 18 months, with interest rates taking centre stage and mortgage holders pondering the impact of 13 consecutive rate hikes on their financial well-being. We spoke to Christian Stevens of Shore Financial to gain insights into the effects of this evolving landscape on investors and their properties and discuss the ins and outs of refinancing a mortgage.

The impact of rising interest rates

The surge in interest rates sent shockwaves through the real estate market, leaving many investors concerned about the impact on their cash flow. To adapt to the challenges posed by the rapid increase in mortgage rates, many investors have proactively raised rents to maintain their financial equilibrium. However, they find themselves navigating a landscape where their options are limited due to evolving legislation, and with mortgage repayments skyrocketing at a pace four times faster than rental increases, investors are now experiencing a financial squeeze.

Although the notorious ‘fixed rate cliff’ turned out to be far less treacherous than the media was forecasting, monthly mortgage repayments have seen a noticeable uptick, while borrowing capacities have been significantly impacted. As Christian noted, with a mere 25-point interest rate hike nibbling away at borrowing capacity and reducing it by approximately 2.5%, we’ve seen the cumulative effect of numerous hikes lead to a substantial 40% decrease in borrowing capacity over the past 18 months.

Despite these challenges, recent rate pauses appear to have allayed some of the initial anxiety and are giving people time to take a closer look at their financial strategies, especially regarding the potential transition from fixed-rate to variable-rate mortgages.

Should you fix now or stay variable?

Choosing between a fixed or variable mortgage isn’t a straightforward decision; it must align with individual financial circumstances. In the current landscape, pundits are forecasting a potential plateau and even suggesting we may see a slow reduction in interest rates as we roll into 2024. These are certainly factors that may sway some borrowers away from fixing their rates.

Adding complexity to the decision-making process is the time lag of approximately three months between a rate increase and its tangible impact on the broader market. With the immediate effects of the recent rate hikes only now starting to emerge, the next few weeks and months are bound to play a pivotal role in both real estate and the wider financial markets, providing valuable insights that will further inform decisions about whether to lock in a fixed-rate mortgage or remain on the variable rate path.

Refinancing: a lifeline for many investors

In some cases, investors may contemplate the possibility of offloading a property to alleviate these financial strains. However, this is often a last-resort case, and there are other less drastic possibilities that may mitigate the discrepancy between increased mortgage costs and rental income.

Christian was keen to point out that refinancing can be a very promising option, with potential savings of up to $9,500 per year, which can provide substantial relief in offsetting the impact of rising interest rates. Of course, it’s essential for individual investors to seek professional financial advice and weigh their options carefully, considering the long-term implications of such decisions on their property portfolios and financial goals.

Refinancing process and considerations

“If you do decide to refinance,” Christian says, “the process may seem daunting, but it is actually quite straightforward. It typically involves updating your income documents and obtaining a new property valuation.” A good broker or financial advisor will help you gather everything you need and ensure the process runs smoothly.

The good news is that, as a result of the COVID-19 boom, property values have surged, with increases of between 20% and 40% across the country. This can work to your advantage when refinancing. When your property is valued higher, it results in a lower loan-to-value ratio (LTV), which is the ratio of your loan amount to the current market value of your property. A lower LTV signals to lenders that you pose less risk as a borrower, which can lead to more attractive interest rates.

The entire refinancing process usually takes 2-3 weeks, and while refinancing can cost a few hundred dollars, the savings can be substantial, potentially reaching $20,000 over two years - well worth a little paperwork and a small initial outlay!

Leveraging equity for property improvement

Increased equity also presents an enticing opportunity when it comes to refinancing, as homeowners can access a portion of their newfound equity and use it for various purposes, including non-structural renovations. Updating elements like bathrooms, kitchens, or flooring not only enhances the property’s overall appeal but also allows landlords to justify charging higher rents to tenants, thereby bolstering rental yields.

A good investment manager will play a pivotal role in guiding clients on how to effectively leverage this equity to build wealth through property. The art of using equity wisely can be a powerful tool in achieving long-term financial security. By strategically reinvesting in their properties, property owners can not only enjoy increased rental income but also potentially see their property values rise even further over time, aligning with the goal of building a robust, income-producing property portfolio for a secure financial future.

A final word

The recent interest rate increases have introduced new challenges for property investors and owner-occupiers. While the decision to fix or remain variable depends on individual circumstances, mortgage refinancing is proving to be a valuable strategy for many, as it can lead to significant savings and help investors weather the storm of rising interest rates.

Moreover, property investors can explore leveraging their equity to improve properties and boost rental income. As always, it’s imperative to seek professional advice and review your financial options carefully to ensure long-term financial stability in the property market.

DiJones Real Estate, together with their directors, officers, employees and agents have used their best endeavours to ensure the information passed on in this document is accurate. However, you must make your own enquiries in relation to the information contained in this document and seek advice from your financial advisor, broker or accountant to ascertain its application to your circumstances.
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