What high inflation means for home financing in the long run

Years of inflation and higher interest rates have eroded savings, pushed people to refinance and fostered cautionary spending among mortgage holders – habits that could well be here to stay, experts say.

The Reserve Bank of Australia (RBA) has raised the cash rate 13 times since May 2022, currently targeting 4.35% to control inflation, which dropped to 2.8% in the year to the September quarter, the first time in three and a half years it's been below 3%.

But despite higher interest rates, Australia's property market has remained buoyant.

PropTrack reports national property prices increased by 5.6% over the year to October, reaching a record median value of $797,000, with capital city prices up 5.9% to $868,000.

Meanwhile, the number of new housing loans was 18.9% higher in September 2024 compared to a year ago.

"People still have strong confidence in the property market," said Curtin University School of Accounting, Economics and Finance professor Rachel Ong ViforJ.

Australians remain confident in the strength of the property market despite struggling through years of high inflation. Picture: Getty

However, with higher property prices, a greater percentage of income is needed to fund mortgage repayments. This, combined with increased interest rates and living costs, is exacerbating financial strain.

Finder’s live consumer sentiment tracker shows 47% of Australian homeowners were struggling with mortgage repayments as of October 2024, compared to 24% in May 2022, with one in five having missed a payment or sought reprieve.

"People are becoming more reserved in their spending and looking to save more," Ms Ong says. "In fact, we know that much of the recent tax cuts have been put into offset and deposit accounts instead of being spent."

Sydney-based Mortgage Choice broker Leanne Johnstone said her clients have become more savvy with their budgets as they become accustomed to a high-interest-rate environment.

"Far more clients have reviewed their expenses in great detail before even talking with me. They are focused on loan repayments and how that works within their budget, with far fewer saying, 'we just want to borrow as much as we can'. And that's a good thing."

Those hoping to make it onto the property ladder are increasingly conservative and only looking to borrow what they know they can comfortably repay. Picture: Getty

Popular strategies

Unsurprisingly, there's been a dramatic rise in refinancing, which peaked in March with $21.4 billion worth of home loans refinanced, up from $17.3 billion in May 2022 before the RBA started lifting the cash rate.

Mortgage Choice data also shows a surge in refinancing demand, hitting its highest level in two years in May 2023, with 47% of loans for refinancing. This demand cooled to 32% by October, suggesting most Australians who could refinance have already done so.

"If you've rolled off a 2% fixed rate onto a 6.02% interest rate, your largest expense has gone up dramatically," Ms Johnstone explains. "Refinancing, particularly for the last two years, has been particularly high." 

Parents are also stepping in to help though gifts, loans or acting as guarantors.

"Many turn to the ‘bank of mum and dad’ for home financing in times of high inflation," Ong adds. "Long term, this support will become a critical form of home financing to help young people overcome inflationary barriers to break into the property market."

Debt consolidation is another trend Ms Johnstone has seen.

 "Some clients have approached me to increase their loan by say $30,000 to cover their car loan and credit card debt."

This strategy has pros and cons, she adds.

"It can make life a little more affordable but you may be extending that debt over 30 years, so it's a good idea to make as many extra payments as you can."

Ms Ong believes higher property prices and mortgage repayments may lead to extended mortgage terms, typically set at 30 years in Australia.

"We need to quickly grow the supply of housing in entry-level markets. Otherwise, we may start treading into 35- or 40-year mortgage terms, which are now very common in countries like the UK."

There is increasing demand for entry-level housing to be built in Australia to increase options for first-home buyers. Picture: Getty

Advice for home financing in times of high inflation

When faced with high interest rates and living costs, experts recommend carefully reviewing monthly expenses to ensure mortgage payments are manageable, and shopping around for favourable loan terms with the help of a broker.

"Now more than ever, borrowers need to be in the habit of reviewing their monthly spending," Finder home loans expert Richard Whitten says.

"If you're about to apply for a home loan, whether as a first home buyer or refinancer, getting your spending down in the three months leading up to the application puts you in a stronger position."

For existing loan holders, The University of Adelaide master of property Peter Koulizos recommends maximising offset accounts to "significantly help with debt repayments".

"Using this strategy, a $10,000 deposit in an offset account at a 6.5% mortgage rate could save $650 annually, more money than you'd earn in a savings account and without tax on interest earned,” he explains.

Shared equity schemes offered by many state governments, and soon the federal government through its Help to Buy scheme, are "fantastic incentives" for first home buyers, he adds.

Under the national scheme, the commonwealth would cover 40% of the purchase price for new homes and 30% for existing homes to eligible participants, with a minimum deposit of 2%.

How will interest rate falls impact home financing?

For those struggling with high mortgage repayments, relief may be in sight.

The big four banks and economists predict a rate cut could land in early 2025.

This insight has prompted many Australians to choose variable mortgages. Currently, only about 2% are on fixed rates, down from 11% in May 2022, according to Finder.

When the RBA lowers cash rates, experts anticipate another surge in property prices and refinancing.

RBA governor Michele Bullock has said interest rate cuts will need to wait until the trimmed mean of inflation is under 3%. Picture: realestate.com.au

"People will rush to get a better deal and lenders will compete with better offers for new borrowers," Mr Whitten says. "Lower rates may also push property prices up, as people can borrow a little more.

"But given how stretched the average Australian is right now, it's unclear if falling rates will drive prices up that much."

Ms Johnstone says reduced rates may free up some discretionary income each month for many Australians, allowing borrowers to make extra payments and shorten loan terms.

However, she warns that a reduction in the cash rate won't automatically lower repayments unless borrowers request it.

"When interest rates decrease, many lenders will keep repayments the way they are. The interest stays the same – but that simply means you'll pay off the loan quicker."