Looking back on 2023
Welcome to the finance update for the week ending 9 December, our last weekly referrar email for 2023.
It has been a tiring and at times challenging year across the broader finance and property industry, and everyone I speak to is relieved that they can take a bit of a break over the coming month, put the year behind them, and recharge for a bigger and better year next year.
In this week’s newsletter, it seems appropriate to take a look back at the two themes that dominated the finance industry in 2023; the impact of refinance cashback offers, and increasing interest rates.
I wish you a wonderful festive season, and hope that you have an opportunity to spend quality time with family and friends.
Here’s to a peaceful and prosperous 2024!
How do home loan cashbacks work?
Cashback deals are special home loan offers where the lender pays the borrower a sum of cash (often between $2000 and $5000), when they refinance a mortgage from another lender to them.
Why are they a problem?
Whilst the cash injection can on the surface be of benefit to the client, these deals don’t always stack up in favour of the borrower in real terms.
Suitability aside, they drove a frenzy (and I don’t use that term lightly!) of refinance activity as borrowers chased a quick win, and in doing so triggered corresponding frenzy in commission clawbacks, meaning that if a person refinanced within say 12 months of the initial loan being put in place, lenders would call back the commission that they had paid the broker for settling the first loan.
Further more, as I suggested in a newsletter in February, the money borrowers received as a cash back invariably got spent rather than saved, and as such cashbacks were a very real contributor to inflation.
What is the status of cashback offers now?
Fortunately lenders have realised that cashback deals are problematic at many levels, not least of all as they relate to their profitability. So whilst this time last year nearly every well known lender was offering a cashback incentive, these days they have almost disappeared altogether.
Only those with their heads buried in the sand wouldn’t know that interest rates continued to rise through much of 2023.
Whilst there was a reprieve through the middle of the year, inflation raised its ugly head again and the RBA again took to it with a hammer in November.
Aside from pushing up repayments even further, the impact of continued interest rate rises has put even more pressure on borrowing capacity during the year, and ensured that the amount of money a borrower/s needed to earn to afford an average priced home needed to be earning more money than ever before.
So where did interest rates start and finish over the past 12 months?
The following table tell the story.
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.
1 Year Fixed
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.