Six forces that will shape your home loan decisions in 2023.
Understanding the key home loan trends for 2023 matters more than ever for Australian borrowers. The 2022 cash rate started at a historic low of 0.1% and ended at 3.10%, a 10-year high. Inflation hit 7.3%, its highest level in 32 years. Property values fell in most major cities, erasing many of the gains made during the pandemic.
Will the turbulence continue? Several indicators point to what 2023 has in store. Whether you are buying your first home, refinancing an existing loan or investing in property, these six trends are worth watching closely. Use our loan repayment calculator to model how different rate scenarios might affect your monthly budget.
Cash rate
The RBA looks set to continue lifting the cash rate into 2023. Major banks including Westpac and ANZ have forecast the rate reaching as high as 3.85%. Most economists expect the rate to peak sometime in the first half of 2023, with some predicting the RBA could start cutting rates in late 2023 or early 2024.
For borrowers on variable rates, each 0.25% increase in the cash rate adds roughly $65 to $80 per month on a $500,000 loan. If you are coming up to a fixed-rate expiry or considering refinancing, it is worth understanding how much rate movement you can absorb before your budget becomes strained.
Keeping an eye on RBA decisions throughout 2023 will be essential. Our RBA interest rate overview provides useful context on how the rate cycle has developed over the past two years.
Borrowing power
Your borrowing power in 2023 is likely to be significantly lower than it was in early 2022. Australian lenders assess home loan applications using a serviceability buffer. Under current rules, they add 3% to the interest rate when calculating whether you can afford the repayments.
If the lowest available rates sit around 5%, lenders will assess your capacity to repay as if the rate were 8%. For first home buyers this means compromising on size, location or property type compared to what might have been possible 18 months earlier.
Knowing your current borrowing capacity before you start looking is essential. Check your borrowing power now to get a realistic starting point for your property search in 2023.
Fixed-rate cliff
A large wave of fixed-rate home loans are due to expire in 2023. Many of these were taken out during the pandemic when the cash rate was 0.1%, with some borrowers locking in rates as low as 1.95% for two to three years. CoreLogic data shows that most of these fixed terms were for two years, meaning the bulk of expiries fall between April and December 2023.
When those loans revert to variable rates, repayments could jump sharply. In Sydney, the increase could be as much as $2,000 per month on a typical loan. Even in more affordable states, borrowers face increases of $500 to $600 per month.
This is sometimes called the fixed-rate cliff or refinance cliff. Borrowers approaching that expiry should start reviewing their options now rather than waiting. Having a clear mortgage exit strategy can help you move to a more competitive loan before the revert rate kicks in.
Unemployment and migration
Employment stability matters more than ever when taking on a home loan in a rising-rate environment. Most economists entering 2023 were forecasting a modest increase in unemployment. The RBA projected the unemployment rate would hold near 3.5% until mid-2023, then rise gradually to around 4.25% by the end of 2024. Deutsche Bank was more cautious, forecasting 4.5% by December 2023.
If you are considering buying or refinancing, having certainty around your employment prospects over the next few years is a sensible first step. Talk to your employer before committing to a loan.
Overseas migration is also reopening after border closures. More students and workers arriving in Australia will put additional pressure on an already strained rental market, pushing rents higher. For investors, this could improve rental demand over the medium term.
Property prices
Most Australian property markets were falling entering 2023, with Sydney and Melbourne expected to see larger declines than other cities. Further rate rises will add downward pressure on prices in the short term.
However, the pace of decline appeared to be slowing. Some markets, particularly Adelaide and Brisbane, were showing signs of stabilisation. Each city will reach its low point at a different time, so watching your specific local market closely is important.
For buyers who have been waiting on the sidelines, the right time to buy depends on your personal circumstances as much as the broader market. Lower prices mean less deposit required and potentially more properties within your budget. Just make sure you understand the total cost of purchasing, including upfront fees, before you commit.
Common questions
Q: What is the fixed-rate cliff and does it affect me?
The fixed-rate cliff refers to the large number of borrowers who locked in very low fixed rates during 2021 and are due to roll off those rates in 2023. When these loans revert to current variable rates, monthly repayments can increase by hundreds or even thousands of dollars. If your fixed term is ending in 2023, it is worth starting the conversation about your options now — waiting until the last minute limits your choices.
Q: Will borrowing power increase in 2023?
Borrowing power has been falling as the RBA raises rates, because lenders assess serviceability at a rate 3% above the current loan rate. If rates continue to rise in early 2023, borrowing power is likely to fall further before it stabilises. Once the RBA pauses or starts cutting, borrowing capacity should gradually recover.
Q: Is 2023 a good time to buy property in Australia?
That depends on your personal situation. Prices in most markets have come down from 2021 peaks, which means more properties are within budget for some buyers. On the other hand, higher interest rates mean larger monthly repayments than two years ago. If you have stable employment, a solid deposit and a long-term view, buying in a softer market can still make sense. A mortgage broker can help you assess your specific position.