Are you on the verge of falling off the ‘fixed rate mortgage cliff’? Some households could increase the repayments on their home by 60 percent
- Mortgage loans taken out with a fixed interest rate of two years that mature
- Many will see interest rates on loans rise from two to five percent
- The repayments go up by 40 percent and even by 60 percent
A dreaded deadline is fast approaching for many households and it could spell widespread economic disaster.
Hundreds or thousands of mortgage holders will experience the sudden shock this year of paying about two percent interest on their home loans to at least five percent in what has been called the “fixed-rate mortgage cliff.”
That’s because many borrowers took advantage of the Reserve Bank’s record-low 0.1 percent cash interest rate in 2021 to secure ultra-low two-year fixed-rate repayments.
Many homebuyers face a year of financial stress as many ultra-low fixed-rate mortgages approach maturity
A Reserve Bank document released in September found that 35 percent of residential mortgages are fixed, far higher than the long-term average of 20 percent.
However, when these deals expire in 2023, it means borrowers will go straight back to a floating rate mortgage and see the sudden jump in the average fixed rate from 2.14 percent to 5.6 percent.
For a borrower with an average $600,000 mortgage who would see their monthly payments jump abruptly by at least 40 percent, that’s a $934 increase from $2,291 to $3,225.
Some borrowers who managed to get rates lower than the average fixed rate could rise nearly four percent.
Lenders must assess whether a potential borrower is able to cope with a three percentage point increase in variable mortgage rates.
Home borrowers who took out fixed-rate loans last year will struggle in 2023 as their monthly repayments rise by 40 percent or even 60 percent in some cases
But since May, the RBA cash rate has already risen 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 does not stop there: the four major banks expect at least two more rate hikes in the coming months, which would increase the interest payment to 6.1 percent.
RBA figures show that 50 percent of households coming off a fixed-rate mortgage in 2023 will immediately have to pay 40 percent more.
But more than 11 percent of households will have to pay an additional 60 percent.
If, as widely expected, interest rates rise two more times, the RBA calculated that 14.6 percent of mortgage holders are at serious risk of default.
It is feared that the defaults could put serious downward pressure on the real estate market
The scenario is beginning to sound disturbingly like the 2008 US real estate crash, where widespread defaults drove huge financial institutions into trouble, some even went under, causing credit to freeze.
That situation is much less likely with Australian banks, which operate under stricter lending rules, but defaults could cause a plunge in the property market.
Home borrowers would be forced to sell in an environment where banks couldn’t lend as much, leading to falling home prices.
In the worst-case scenario, the value of a property can 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 that “2023 is expected to be a more challenging year for the resale market.”
“Most of the outstanding firm loan terms covered by the pandemic will expire by the end of next year,” it said.
This could lead to more motivated sales in a high-interest rate environment, even if property sellers suffer losses.
“The main risk is a continuously rising interest rate environment, as most outstanding fixed rate loans mature until the end of next year.”
The Reserve Bank of Australia has raised rates for eight consecutive months since May to a 10-year high of 3.1 percent, with more rate hikes expected next year to tackle the worst inflation in 32 years.