There are nearly 900,000 Australians who opted for low-cost fixed-rate mortgages during the COVID-19 pandemic. They are at risk of facing financial difficulties and possibly defaulting on their mortgages. They are facing a potential financial challenge known as the “fixed-rate mortgage cliff.” In response to the pandemic’s economic consequences, the Reserve Bank (RBA) allowed banks to offer three-year fixed-rate loans. Borrowers took advantage of this.
However, there are people who secured these loans between 2020 and 2022. They will soon experience a transition from their current low fixed interest rates. It will move to much higher variable rates due to successive rate hikes over the RBA’s past ten meetings.
By the end of 2023, approximately 880,000 Australians with outstanding fixed-rate loans in early 2022 will see their loans expire, and some borrowers may experience a significant increase in their repayments, effectively tripling them overnight.
Australian Bureau of Statistics (ABS)
According to the Australian Bureau of Statistics (ABS), the average loan amount taken out between 2020-2022 was around $550,000. For someone with a loan of this amount, the potential increase in repayments could be as much as an additional $891 per month. In the case of a $1 million loan, the monthly repayment amount would increase by $1620.
In the event of another rate hike during the RBA’s April meeting on Tuesday, the aforementioned figures could rise even further. According to Mortgage Choice CEO Anthony Waldron, there was a survey of 1000 home loan customers that was conducted by the company. It revealed that 71% of them were worried about transitioning from their fixed-term rate. Mr. Waldron expressed concern about the number of older Australians who may be on a pension. There are others planning for retirement and approaching the “fixed-rate cliff.
Those who are unprepared for the potential increase in repayments could face a significant financial burden. 80% of people already consider home loan repayments to be their biggest monthly expense. Further interest rate hikes will exacerbate the issue of financial stress. According to Sally Tindall, the research director at ratecity.com.au, those with fixed-rate loans should not ignore the issue but take action now.
She advises testing out one’s budget by making higher repayments while interest rates are still low. They should do this rather than waiting for the fixed rate to end. This approach would not only provide a sense of security but also create a buffer in the loan for emergencies.
