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Fixed Rate Mortgage Cliff

Fixed Rate Mortgage Cliff

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Many media analysts have described the “fixed rate mortgage cliff” as a major threat to housing prices and economic stability in 2023. Many commentators use this term, but what does this really mean?

What is the fixed-rate mortgage cliff?

During the pandemic years (think back to 2020 -2022), mortgage rates or home loan interest rates fell dramatically. Banks in Australia aggressively competed for home loans with record low rates, as low as 1.89% in 2021 for owner-occupied home loans. As bank funding costs plummeted, strong competition across bank lenders led to record-low interest rates.

The RBA published an analysis of home loan interest rates during this time, and this is outlined in the following figure:

home loan intrest rate outlines

Australian Banks financed approximately 1.2 million new loans during this period, and with fixed rates, at record lows, approximately 46% of new mortgages were on a fixed rate. This included split loans. Historically 15% of home loans were fixed-rate mortgages.

In summary, we have a record number of home loans on historically low fixed rates and as the RBA noted in its review, approx. 35% of the mortgages finish their fixed rates during 2023.

Borrowers will have to rewrite their loans at much higher rates. Assuming a borrower fixed at approx 2%, their variable rate in 2023 would be between 5.13 and 6.2%. Interest costs would be 2.5% higher, or for every $100,000 borrowed, $2,500 to $3,000 per annum more.

We have many home loans coming with fixed rates, and assuming an average home loan size of $500,000 and, say, 200,000 home loans being impacted, this translates to a total extra interest bill of approx. $2.5 billion per annum. Hence the term mortgage cliff.

This means households have much less money to spend due to higher interest costs and economic activity may fall quickly along with house prices.

So what may happen?

We will likely see a higher number of mortgage defaults, which is unfortunate. Downstream impacts are being felt with collapses in the building sector and liquidations.

But most households will adjust their expenditure and try to manage by spending less on non-essential items.

What can you do?

Couple discussing their mortgage plan

If you are coming off a fixed rate, the most important thing you can do right now is to speak to your mortgage broker and assess your home loan. A home loan health check is important, and with rising interest rates, it is important to understand your borrowing capacity.

Some of the options available to you include:

  1. Refinancing to a lower rate
  2. Refixing your home loan
  3. Approaching your bank for a lower rate

Talk to your mortgage broker

Contact What If We Finance to assess your options and determine the best path forward. We are Melbourne’s best independent mortgage broker and are available 7 days a week to listen and help you lessen the impact of the mortgage cliff.

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