As we move into the second half of 2023, more than 800,000+ Australian homeowners are preparing for their delightfully low fixed-rate mortgage conditions to come to an end, resulting in a sharp increase in their mortgage repayments. This widespread economic pattern, called the “fixed rate mortgage cliff” is predicted to cause significant undesirable effects.
The cause of this pattern is straightforward. The pandemic-induced economic environment, coupled with historically low-interest rates, made fixed-rate loans increasingly popular among homeowners.
However, with the Reserve Bank of Australia gradually raising the cash rate in response to control inflation, and many of these fixed periods coming to an end, borrowers are now bracing themselves for higher monthly repayments.
In this article, I’ll explore the ins and outs of this “cliff”, its implications for borrowers, the potential financial burden they may face, and the benefits of refinancing.
What is causing the “fixed rate mortgage cliff”?
The COVID-19 pandemic prompted the Reserve Bank of Australia (“RBA”) to take swift action to stimulate the economy. One of the measures it employed was reducing the national cash interest rate to record lows.
This meant that banks could access cheaper-than-usual credit, which they passed onto their customers as low, fixed-rate mortgages. To comfort the general public furthermore, the RBA’s governor assured that these low rates were unlikely to start increasing until 2024.
Naturally, many took advantage of this offer and locked in new or refinanced mortgages at very exciting rates.
However, fast forward until now (which is the end of these 2-3 year fixed interest rate periods) and the RBA has already significantly hiked up the cash interest rate.
This is causing financial stress for many, as approximately half of all fixed-rate mortgages (totalling $350BN worth of lending) are ending this year.
According to the Australian Bureau of Statistics:
- In 2022, 590,000 loans finished their fixed rate period,
- In 2023, 880,000 loans will finish their fixed rate period, and
- In 2024, 450,000 loans will finish their fixed rate period.
How does the fixed rate cliff affect borrowers?
For many borrowers, the rate increase could create financial difficulties, especially for those who might not have adequately prepared for the transition.
According to estimates in this article here, the average influence of the fixed rate cliff suggests that a household with a typical $550,000 mortgage will be required to pay almost $900 more each month.
Larger mortgages, of up to $1 million, may have to pay an additional $1,620 per month.
Additionally, the transition from fixed-rate loans to variable-rate loans may pose risks to financial stability. The abrupt rise in payments could lead to slower household consumption and potential defaults on loans, impacting lenders.
Although fixed-rate loans are generally riskier than variable-rate loans, the differences are not substantial. Some borrowers may struggle to adjust to higher loan payments, particularly if they spend more than 30 per cent of their income on scheduled loan payments.
Here’s why refinancing is the best option for many
Refinancing is a popular sport. According to the Australian Bureau of Statistics, in May 2023, refinancing for owner-occupied homes was 21% higher than a year ago, and refinancing for investment properties was 25.6% higher.
This shouldn’t be surprising, as refinancing is one of the most effective ways to prepare for any undesirable effects of the ‘cliff.
Here are some ways in which refinancing can help:
- Lowering Interest Rates: One of the most popular reasons for refinancing is to access a lower interest rate. With the cash rate steadily increasing, borrowers may find more competitive deals available in the market, helping to reduce the overall interest burden on their home loan.
- Changing Loan Structure: Another reason for refinancing involves modifying or updating lending structures or types. Borrowers can consider switching from fixed-rate loans to variable-rate loans or vice versa, depending on their risk tolerance and outlook on interest rates.
- Consolidating Debt: Debt consolidation could result in lower overall interest costs and simplified debt management.
- Extending Loan Terms: Refinancing may provide an option to extend the loan term, resulting in reduced monthly repayments. While this might lead to paying more interest over the long term, it can help borrowers manage their immediate financial commitments during times of rate increases.
- Reviewing Loan Features: When refinancing, borrowers can assess their loan features and ensure they align with their financial goals. This could include features like offset accounts, redraw facilities, or the ability to make extra repayments without penalties.
It’s important to note that while refinancing can offer significant benefits, borrowers should carefully consider their individual circumstances and the associated costs.
Some lenders may charge break costs for refinancing before the fixed-rate term expires. Therefore, it may be prudent for borrowers to wait until their fixed rate has expired before proceeding with refinancing.
Can We Help You Navigate The “Cliff”?
The fixed-rate cliff, and the subsequent rise in interest rates, present unique challenges for Australian homeowners.
If you’re looking for an expert team to help with your refinance, or implement other strategies that may help you through this situation, request a 30-Minute Finance Strategy Session during which you will…
- Get a better understanding of the lending options available to you, so you can refinance with confidence
- Discover no-cost ways to save money on interest, fees, and charges
- Get an up-to-date picture of the lending landscape including rates, conditions, and how to structure loans
- Learn about our process to find you a better loan that could save you thousands.
This no-obligation session will be held with one of our experienced mortgage brokers.
Please be assured this will not be a thinly disguised sales presentation. On the contrary, you’ll receive our best strategic advice, specific to your situation, so you too can accumulate multiple properties without sacrificing your current lifestyle and accelerate your progress towards wealth.
Please note, the numbers and assumptions listed in this article are for educational purposes only. Individuals should seek specific advice pertaining to their unique situation and the real estate market before making any decisions.
Trilogy Funding Two is a corporate credit representative (Representative Number 506131) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237)