Is it good to refinance when house price is falling?

In 2022, falling Australian house prices left a lot of homeowners worried about the value of their properties. At the time, interest rates increased while house prices declined. Many turned to refinancing to get the best deal on their mortgages. 

However, the declining Australian house prices proved to be a challenge for many homeowners seeking to refinance, especially for those who suddenly didn’t have as much equity as they thought they would.  

So, what happens when house prices fall? In this article, we’ll walk you through the nitty gritty of falling house prices and what you can do about them. 

How do property values affect your equity?

Equity is calculated by taking the current value of your home loan, and subtracting how much you still owe on it. It’s the difference between its present-day market value and the remaining loan value. Equity goes up as property values increase and you pay more of your loan. 

When property prices depreciate, your equity can go down too. If the value of the property falls lower than the amount you still owe on your home loan, this puts you in negative equity.  

What is negative equity? 

To put it simply, negative equity happens when your remaining loan balance is higher than the current market value of your property. Essentially, you’re paying more for something worth less. 

Of course, no homeowner wants to be put in this situation. The good news is, there are ways to mitigate the effects of negative equity. Try following these tips if you find yourself in similar circumstances: 

Tips to reduce the effect of negative equity 

• Pay off more of your loan – You can increase equity by paying off your loan faster. Increasing payments, making more frequent payments, or making extra payments are great ways to minimise debt. 
• Observe market trends – Equity may also rely on real estate trends, so watch them closely to inform your next move. Keep an eye out for any trends that may indicate improvements in property values. 
• Negotiate for a better interest rate – Talk to your current lender and see what options you have. Completely refinancing your mortgage could be difficult if you have negative equity. 
• Improve your property’s value – Renovating your home can add value to your property. Do your research and see what type of renovations may be most beneficial. Ensure that the return on investment on potential renovations are worth it before moving forward. 
• Don’t redraw from your mortgage – Leave your funds as they are. Avoid using your redraw facilities too much and make paying off your mortgage your priority. 
• Play it safe for now – If you’re working to reduce negative equity, it’s best to avoid risks. You don’t want to affect your cash flow too much and end up selling your property. 

Australian real estate market forecast for mid-2023 to early-2024

In April 2023, Westpac announced its optimistic projections for the second half of 2023 until 2024. Instead of rapidly falling prices as previously feared, the major bank believes that prices may increase. This is due to the higher construction costs and increases in migration. 

Westpac also forecasts that house prices may increase in Sydney by 1% which is a far cry from last year's prediction of an 8% decrease. This trend can be seen in other cities such as Melbourne, Perth, and Brisbane. In 2024, house prices are expected to increase by 5% instead of the 2% predicted earlier. 

Overall, Westpac forecasts national house prices will drop by 10% instead of the 16% previously predicted this 2023. Now, although Australian house prices aren’t falling as largely and rapidly as previously thought, there is still a decline expected until the end of the year.

When house prices start to fall, should you refinance?

A lot of homeowners want to reduce the risk of falling into negative equity. With speculated falling Australian house prices in the near future, many may start looking for ways to refinance their mortgage as early as now.  

Refinancing is a serious undertaking and requires serious consideration. Every homeowner’s situation is unique. There’s no blanket answer to whether refinancing during falling house prices may be the best solution for your financial situation. 

Advantages of refinancing your home during falling house prices

• Lower interest rate – Finding a lower interest rate means paying less on your repayments. This will make it easier to pay your mortgage off quicker and deal with falling house prices better. 
• Avoid negative equity – When you fall into negative equity, it could become much harder to refinance your mortgage. Refinancing just as house prices start to fall may help you avoid that fate. 
• Changed loan payment scheme – If your current loan has a variable interest rate, you can switch to a fixed interest rate so you can have more predictable and stable repayment amounts. Note that it is possible to change loan payment schemes without refinancing. Speak to your lender to know what options are available to you. 

Disadvantages of refinancing your home during falling house prices

• Access to less equity – Because house prices are falling, you may have access to less equity compared to before. If you refinance now instead of waiting for an uptick in the market, you could be leaving a lot of money on the table.  
• Potential for additional costs – Refinancing comes with additional lender requirements depending on where you’re going to borrow.  
• Minimised borrowing power – Lower property values mean less borrowing power. Your refinancing options may be limited when you do it while house prices are falling. 

To refinance or to not refinance; that is the question 

The answer is up to you and what you think is best for your financial situation. But the smart thing to do is talk with a professional about your property concerns. At loans.com.au, we can help you figure out what the best refinance options are and if they’re the right fit for you. Get in touch with us by scheduling an appointment with one of our friendly lending specialists.

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