The fixed-rate cliff looms over the heads of many borrowers who bought a home during the pandemic at a short-term fixed rate as low as 1.95%. It is understandable for them to feel a sense of unease about the impact of rising rates on their finances. Many are concerned that it could lead to mortgage defaults and affect home values. So how serious is the danger? CoreLogic recently released a report on things to know about the fixed-rate cliff. Here are the key takeaways from the report
- The ‘fixed-rate cliff’ refers to the point when the very low fixed rates many borrowers secured on loans during the pandemic will expire, and they have to refinance at potentially much higher rates.
- About 35% of outstanding housing credit is on fixed terms – about 800,000 loans – and around two-thirds of those terms will expire in 2023.
- The pain of rate hikes will be felt most acutely from April 2023, due to the housing boom in April 2021. Borrowers will see stark changes in rates and large loan balances still left to pay.
- Stretched serviceability (difficulty making loan repayments) due to rate hikes could be compounded by an increase in unemployment and higher household costs due to inflation. This could lead to distressed sales and more downward pressure on property values.
- The majority of outstanding home loan debts have already been subjected to steep rate rises, and the housing market has shown resilience. So, most fixed-rate borrowers with similar incomes to variable-rate holders should be able to cope.
The fixed-rate cliff is a serious threat, but let’s go through some reasons why it doesn’t have to be a catastrophe.
Why You Don’t Have To Panic About The Fixed-Rate Cliff
Variable Borrowing Has Shown Resilience
Mortgaged households are showing resilience. Repayments on loans secured in April 2022 would have increased by $935 a month or more by the end of last year. Yet, the Australian housing market has remained relatively stable despite rising rates, with new property listings still below the five-year average.
Fixed-rate borrowers are likely to cope with the rate increases similarly to variable-rate borrowers, as they have similar incomes and have been able to save in offset and redraw accounts. However, there is still a risk that some households on variable repayments will not have sufficient savings to buffer against future rate rises, and this may extend to some fixed-rate borrowers, too.
Variable Rates Can Come Back Down
Currently, the vast majority of new housing finance is being taken out on variable terms, with only 4.9% of lending going out on fixed terms in December 2022. This means most outstanding housing debt will be exposed to interest-rate fluctuations this year.
While this increases the risk of serviceability problems as rates rise, it also means borrowers have a better chance of finding a lower interest rate when the cash rate reaches its peak.
Although households may face challenging conditions in the short term due to the rise in variable interest rates, the high-interest payments are not expected to last for the entire duration of their loans. Furthermore, banks may be motivated to lower their mortgage rates to remain competitive, especially since external refinancing – leaving your current lender to refinance – is at record levels.
Most Markets Continue To Have A High Level Of Equity
Since April 2022, the value of the average Australian home has fallen by 8.9%. However, only 2.9% of suburbs across Australia have experienced a drop in home values of more than 20% from their peak, CoreLogic states.
Despite a decline in home values since April 2022, only a small proportion of borrowers are estimated to have a home value too low to pay off their debt by selling, thanks to large value gains in recent years.
RBA assistant governor Brad Jones says only about 0.5% of homes are in negative equity. With a 10% decline in home values, the RBA estimates negative equity would rise by 1%.
It Will Take Some Time To Observe The Effect
Head of residential research Australia at Corelogic, Eliza Owen, states that signs of distress in the housing market will take a long time to show.
The latest data available from APRA on ‘non-performing’ loans shows that only 1.0% of home loans are overdue by 30 days or more. And this number has been falling. However, it’s important to note that this figure is from September 2022, before the four most recent rate rises took place as of February 2023.
Understanding how higher interest rates affect households is challenging because the response to increased interest costs will vary among income groups and support systems. Some may move in with family or rent out their property to cover their repayment, while those with higher incomes can usually afford to spend a larger portion of their earnings on their home.
Banks and other financial institutions will take steps to prevent large-scale defaults in the housing market, like offering loan term extensions or temporary interest-only repayments.
So, although those with fixed-rate loans may experience painful adjustments, there is no need to panic. Instead, making well-informed decisions and considering the various options available for managing higher interest expenses is crucial. If you are preparing to face the fixed-rate cliff, visit our mortgage cliff page for preparation tips.
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You don’t have to be stuck with your revert rate. We can help you refinance to a more competitive rate and avoid the fixed-rate cliff. With over 50 lenders in our panel, our team of dedicated expert brokers would be happy to find the right options for you!
Call us on 1300 889 743 or fill in our free online assessment form to start saving on your mortgage repayments today!