Australia’s fixed-rate mortgage cliff is a looming financial event with significant potential impact on homeowners across the country. As a high number of fixed-rate loans transition to variable rates in 2023, homeowners could see a drastic increase in their mortgage repayments. This article delves into the intricacies of this situation, examining the potential impacts and exploring possible solutions.
TRANSITION FROM FIXED TO VARIABLE RATES
For many borrowers, the initial appeal of fixed-rate loans was the assurance given by RBA governor Philip Lowe that interest rates were unlikely to skyrocket until 2024. However, this guidance was later retracted, causing some disquiet among borrowers.
In May 2021, the average new fixed-rate loan for a term of three years or less was 1.95 per cent, while the new variable rate loan was 2.8 per cent, according to the RBA data. Consequently, many borrowers opted for a fixed-rate loan, banking on the fact that interest rates wouldn’t fall further. By mid-2021, approximately 45% of new loans were fixed-rate, a drastic increase from the mere 5% today.
Between 2020 and 2021, Australian banks lent AUD 394 billion in fixed mortgage commitments to Australian borrowers.
THE FIXED-RATE MORTGAGE CLIFF: A CLOSER LOOK
As we fast-forward to 2023, the situation changes significantly. Approximately 880,000 fixed loans, initially written at low-interest rates, are due to transition to higher variable rates.
The RBA states that about AUD 350 billion – constituting half of all fixed-rate credit – will expire this year. This situation is often referred to as the “mortgage cliff”. The remaining 38% of fixed-rate credit, including about 450,000 loan facilities, will expire in 2024 and beyond.
The most significant impact will be felt between now and September, with one-third of fixed-term credit set to expire. Affected households will have to brace themselves for the 350 basis point increase in the cash rate over the past year.
THE IMPACT ON BORROWERS
The extent to which households will need to increase their payments will depend on their initial fixed rate and whether they transition to a competitive variable rate. However, regardless of the scenario, they are looking at a 3 to 4 percentage point increase in their home loan rate.
Borrowers who took out mortgages larger than AUD 615,000 will face a monthly repayment increase of more than AUD 1000, assuming the entire loan is fixed. A household with a AUD 750,000 loan will have to find an extra AUD 1215 per month – or AUD 280 per week – when their loan switches to a variable rate.
This calculation assumes they had locked in a 2.48 per cent interest rate for three years, which is the average, outstanding, fixed rate, and refinance to a competitive 5.58 per cent variable rate upon maturity.
Borrowers with a AUD 1 million mortgage will experience a AUD 1620 increase in their monthly repayments, or AUD 374 per week, based on these assumptions. Homeowners servicing a AUD 500,000 mortgage will see their repayments increase AUD 810 per month, or AUD 187 per week.
The RBA estimates that 90% of fixed-rate loans rolling off this year or next year will have to bear mortgage repayment increases of at least 30%.
AFFORDABILITY CONCERNS FOR HOUSEHOLDS
The question arises, will households be able to afford these increased repayments? The opinions of economists are divided. Some believe the impending fixed-rate mortgage cliff could mark the beginning of a significant economic slowdown.
The RBA expects an increase in home loan arrears in the future as some borrowers struggle to meet higher repayments. Westpac CEO Peter King warned in February that almost half of the bank’s AUD 471 billion in outstanding home loans are likely to breach their original serviceability assessments.
ADDITIONAL PRESSURE ON HOUSEHOLDS
The roll-off comes at a time when households are already under pressure. Consumer prices have been increasing at their fastest pace since the early 1990s, while real wages are at their lowest level in a decade.
Another concern is that fixed-rate borrowers have lower mortgage buffers due to restrictions on their ability to prepay their loans. The RBA estimates that two in five borrowers with small mortgage buffers have fixed rates or are investors with loans in place before 2021.
BANKS’ ROLE IN ASSISTING CUSTOMERS
The banks have stated they are prepared to assist customers struggling to meet repayments. Westpac’s chief executive mentioned that banks have various tools at their disposal to support customers through hardship, including restructuring repayments and transitioning borrowers onto interest-only loans.
Banks are also experimenting with extended loan terms to make repayments more manageable for customers as interest rates further rise.
The federal government’s MoneySmart service advises borrowers experiencing hardship to contact their bank as early as possible. Banks must respond to a hardship request within 21 days.
WHAT SHOULD YOU DO IF YOU ARE COMING OFF A FIXED RATE?
First don’t wait. You need to plan now. You need to see this as an opportunity to understand what’s possible. Your bank can’t do that. They can only offer you the products they have. Kat Dundon of Wealth Folio is able to give you unbiased guidance on what all banks would be able to offer you to ensure you secure the most suitable structure and best rate possible.
Many people don’t realise the smallest shaving of an interest rate can save you thousands.
Why Kat? She works with a team of like minded people dedicated to securing people home loans. You’ll find Kat and her team caring, knowledgeable & interested in your needs.
The fixed-rate mortgage cliff presents a significant challenge for many Australian households. However, with careful planning, support from financial institutions, and government assistance, it’s hoped that households will weather this financial turbulence.
Remember, it’s essential to stay informed about changes in the financial landscape and seek professional advice when needed. As always, it’s crucial to consider your personal circumstances before making any significant financial decisions.