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Are you in danger of falling off the 'fixed-rate mortgage cliff'?

January 22, 2023

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Some households could seen increase in home repayments of 60 per cent

A dreaded deadline is fast approaching for many households and it could spell widespread economic calamity.

Hundreds or thousands of mortgage holders will this year experience the sudden shock of going from paying about two per cent interest on their home loans to at least five per cent in what has been dubbed the 'fixed-rate mortgage cliff'.

That is because many borrowers took advantage of the Reserve Bank's record-low 0.1 per cent cash rate in 2021 to nab ultra-low two-year fixed-rate repayments.

A Reserve Bank paper released in September revealed 35 per cent of home mortgages are fixed, much higher than the long-run average of 20 per cent.

However, when these deals expire in 2023 it will means borrowers will go straight back on to a variable rate mortgage and see the sudden jump from the average fixed rate of 2.14 per cent per cent to 5.6 per cent.

For a borrower with an average $600,000 mortgage that would see their monthly repayments abruptly surge by at least 40 per cent, an increase of $934 from $2,291 to $3,225.

Some borrowers who managed to snag rates lower than the average fixed rate could be looking at jump close to four per cent.

Lenders have to assess a potential borrower's ability to cope with a three percentage point increase in variable mortgage rates.

But since May, the RBA cash rate has already soared by 300 basis points - the most severe pace of monetary policy tightening since the Reserve Bank published a target cash rate in January 1990.

However, the bad news doesn't end there with the big four banks expecting at least two more rate hikes in coming months, which would increase the rate of interest repayment to 6.1 per cent.

RBA figures show 50 per cent of households coming off a fixed-rate mortgage in 2023 will face an immediate jump of paying 40 per cent more.

But more concerning 11 per cent of households will have to come up with 60 per cent extra.

If, as is widely expected, rates go up twice again, the RBA calculated it would put 14.6 per cent of mortgage holders at severe risk of default.

The scenario starts to sound worryingly like the property crash in the US in 2008, where widespread defaults put huge financial institutions in trouble, with some even going under, causing credit to seize up.

That situation is much less probable with Australian banks, which operate under tighter lending regulations, but defaults could cause a dive in the property market.

Home borrowers would be forced to sell in an environment where the banks couldn't lend as much, leading to house price falls.

In a worst case scenario, the value of a property could fall below the balance of the mortgage on it, a situation referred to as negative equity or being 'underwater'.

Real estate data group CoreLogic's Pain and Gain report predicted '2023 is expected to be a more testing year for the resales market'.

'The majority of outstanding fixed loan terms secured through the pandemic will have expired by the end of next year,' it said.
'This could prompt more motivated selling in a high interest rate environment, even if property sellers have to endure a loss.
'The main risk is a continually rising rate environment, as the majority of outstanding fixed-rate loan terms expire through to the end of next year.'

The Reserve Bank of Australia has, since May, raised rates over eight consecutive months to a 10-year high of 3.1 per cent with more interest rate rises expected next year to tackle the worst inflation in 32 years.

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