It’s estimated that approximately 275,000 property investors in Australia could face difficulties in refinancing their fixed-rate loans this year, according to RateCity. With $141 billion worth of fixed-rate mortgages set to expire and refinancing activity having reached the highest level since 2017 (according to the latest AFG Index Data), it's important to understand the challenges and potential solutions in the current market. 

As the financial environment continues to evolve, both residential and commercial borrowers face hurdles when attempting to refinance their loans. This includes navigating interest rate fluctuations, stricter lending criteria, managing credit scores, and changes in property values (in the case of residential borrowers). 

By better understanding these hurdles and how they can be overcome through proactive planning and research, property investors can better prepare for refinancing and the inevitability of break costs. 

The challenges of refinancing 

With the changing environment, it's best to follow the RBA’s monthly meetings to help decide when the best time to refinance is, it is also essential to consider other economic indicators, forecasts, and expert analyses to form a well-rounded understanding of the overall economic conditions. While we saw another pause on the rate hiking cycle in August, that doesn’t mean more rate increases are off the table. Now may be a more appealing time to refinance; however, it’s important to keep in mind that if you’re signing on to a variable rate, the original rate you signed may creep up if the RBA hands down another hike. 

Many lenders have also tightened their lending criteria in response to regulatory requirements set by APRA and elevated risks, which may disqualify some investors from refinancing or have to settle for less favourable terms. APRA refuses to lower its buffer and continues to suggest that banks add 3 per cent on top of the current interest rate when assessing mortgage applications.

Fluctuating property values could also affect the loan-to-value ratio (LVR) for investors. If property values decrease, the value of the property securing the loan decreases. This means that the LVR increases, making it harder for investors to refinance. Nevertheless, with LVRs currently at a historic low, this could be a promising sign for those looking to refinance. It suggests that lenders might be more willing to offer competitive rates, given the reduced risk. For borrowers, this could potentially mean lower monthly repayments and significant savings over the life of the loan.

However, it's essential to note that while low LVRs can be a beneficial factor, they are not the only determinant of a good refinance deal. Other factors such as credit score, income stability, and the overall financial situation are also taken into account.

Ways to improve your refinancing chances

Maintaining a good credit score is crucial for borrowers to be eligible for competitive refinancing options. However, staying on top of credit ratings can be a challenge, especially for those with multiple debts or credit lines being used to manage the rising cost of living. To improve your credit score, try to pay bills on time when possible, keep the use of buy-now-pay-later (BNPL) services to a minimum, make all repayments, and keep credit card balances low.

Beware of BNPL

With Buy Now, Pay Later set to be regulated under credit laws, it is more important than ever for Australians to be mindful of the rise in interest rates, which can make BNPL look like an enticing option for purchases. However, such services can negatively impact one's overall credit score if repayments aren’t made on time. It’s also easy to underestimate how much you’re really spending when expenses are broken into four smaller amounts. 

With many BNPL users unaware of how failing to make repayments or using multiple BNPL services can affect their credit score, lenders are now experiencing issues as a direct result of their debts.

Watch out for hidden lending fees

There can be numerous costs associated with refinancing or switching lenders, so to avoid unwanted surprises, it’s beneficial to research the possible change costs, such as discharge fees, valuation fees, economic fees, establishment, and break costs. Some lenders may provide offsets to incentivise switching providers, but it’s a smart idea to look at when your current contract ends and the pros and cons of breaking a contract. 

Build equity and shop around

Paying down your balance to build equity in the property can also improve the chances of refinancing. Equity is the difference between the value of the property and the outstanding mortgage balance. The more equity one has, the lower the LVR and the less risky the loan is for lenders, improving your chances of refinancing. 

Finally, shopping around and comparing offers from different lenders can help find the most favourable refinancing terms. As different lenders have different lending criteria, interest rates, and fees, it’s essential to understand how they all work - along with potential incentives for switching your home loan from one lender to another. You may be looking for perks such as offset accounts, redraw, and flexibility on variable loan products. Another tip is to keep an eye out for advertised interest rates and comparison rates to see if you can catch a better deal. 

This communication is for information and education purposes only and should not be taken as financial advice or personal recommendation. This material has been prepared without taking into account any particular recipient’s financial objectives or financial situation. Before acting on any information, one should consider the appropriateness of the information provided, having regard to their objectives, financial situation and needs. You should always speak to an accredited financial advisor when considering a mortgage product.