2025 Mortgage strategy: The year to fix or float?

In 2025, borrowers must decide: stick with floating rates or switch to long-term fixed?

2025 Mortgage strategy: The year to fix or float?

Kelvin Davidson (pictured above), chief property economist at CoreLogic, noted a significant trend in mortgage borrowing where the preference for short-term, flexible rates has surged due to recent declines in mortgage rates.

This shift towards choosing floating rates or short-duration fixes is dictating the rhythm of the mortgage market as 2025 unfolds.

Trends in mortgage lending

The mortgage sector has seen heightened activity over the past year, particularly noted from September to November, where lending increased markedly by an average of $1.3 billion over the same period the previous year.

The rise is attributed mainly to new home purchases and bank refinancing, while additional borrowing on existing mortgages has dwindled due to decreased home values affecting homeowners' equity.

Stability in borrowing preferences

Despite economic pressures, the trend toward interest-only loans has not significantly shifted, remaining stable at about 15% of new owner-occupier loans.

This suggests that borrowers are maintaining traditional repayment strategies even in tighter financial circumstances, CoreLogic reported.

Moreover, fears regarding loan defaults have lessened among banks, with a noticeable reduction in provisions for bad housing debts, indicating a recovering confidence in borrower stability.

High LVR lending remains conservative

The market for high loan-to-value ratio (LVR) loans continues to be cautious, with less than 12% of owner-occupier loans in November granted at deposits less than 20%.

First-home buyers remain the primary group navigating this high LVR landscape, representing a significant portion of such borrowing.

The dilemma: To fix or float?

The prevailing uncertainty in mortgage rate trends has led to a stark reduction in long-term fixed-rate borrowing, with only 10% of new loans fixed for over a year – a dramatic drop from 51% the previous year.

In contrast, the preference for floating rates has climbed. This pivot raises a critical question for the future: when will the value in long-term fixed rates entice borrowers back?

Economic indicators and future predictions

The mortgage market in 2025 is expected to grow alongside an increase in property sales.

How borrowers will react to the evolving interest rates, and the impact of debt-to-income (DTI) ratios on lending practices will be key factors to watch, CoreLogic said.

With DTI discussions expected to become more prevalent, borrowers and lenders alike must navigate these financial metrics carefully.

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