Around 23% of all Australian home loans with a fixed interest rate are expected to transition to a variable rate by the end of 2023. As the fixed-rate home loan terms end, many Australian homeowners face higher repayments that may cause significant financial pressure. This event is commonly known as the mortgage cliff.
As interest rates are likely to continue rising in 2023, homeowners should prepare to minimize the impact of the mortgage cliff.
How did the Mortgage Cliff Come to be?
During the pandemic, mortgage rates experienced a significant decline, reaching record lows in May 2021, with short-term fixed rates averaging 1.95% for owner-occupiers. As a result, the proportion of fixed-term home lending increased substantially, accounting for 46% of new mortgage commitments in July and August 2021, significantly higher than its historical average of 15%.
In its October Financial Stability Review, the Reserve Bank of Australia highlighted that approximately 35% of outstanding housing credit was on fixed terms. Almost two-thirds of this debt is set to expire in 2023. Consequently, around 23% of all outstanding fixed mortgage debt will be subject to repricing at much higher rates as the fixed rate period ends this year, potentially creating financial difficulties for many borrowers.
At the end of 2022, the cash rate is currently 3.10%, and the average standard variable rate offered for a 30-year home loan by the big four banks is 5.04%. However, the banks are forecasting further rate rises shortly.
According to the Big Four banks, forecast for the cash rate are as follows:
- Westpac and ANZ expect the cash rate to peak at 3.85% by May 2023.
- NAB has a more conservative estimate, forecasting the cash rate to peak at 3.6% by March 2023 and fall from March 2024 to 3.10%
- CBA expects the cash rate to rise to 3.35% in February 2023.
Worried about falling off the mortgage cliff? Here are several steps you can take to prepare:
Do a budget
Determine whether you can afford the new interest rate by assessing your essential expenses and available cash flow.
Contact your broker
Reach out to your broker at least two months before your fixed rate matures so you can start making plans ahead. If you don’t have a broker, consider finding one to assist you.
Negotiate with your bank
Try to find your revert rate and negotiate with your bank to reduce your interest rate. Check how much they offer new customers to help in the negotiation for a lower rate.
Start saving now
Begin saving to create a buffer to be on the safe side. Considerable savings will help immensely.
Consolidate your debt
If you have multiple debts, consider consolidating them into one loan. Check with your broker to see if your lender allows this. Consolidating your debts into one set of recurring repayments with one interest rate will provide better control of your money and a more precise timeline for when the debt can be paid off. It will also probably be cheaper.
Change your loan term
Brokers can help you change your loan term back to 30 years if you feel like repayments will be too high for you to handle based on your current term. However, before you do this, ensure you understand the risks and that you won’t retire and lack the means to repay the loan before the term ends.
Look at refinancing options
Refinancing comes with costs, such as mortgage discharge fees, valuation fees, and break costs. And if the equity in your property is less than 20%, you may have to pay Lender’s Mortgage Insurance. Many banks offer cashback, which can cover some of your discharge costs if your bank is unwilling to lower your rate.
Seek financial hardship assistance
If you feel unable to make repayments, reach out to your lender’s financial hardship team. Remember that any hardship request will take time to process, so speak to them as soon as possible.
Cut down on discretionary expenses
Reduce your costs by cutting down on discretionary expenses like credit card debts, unnecessary spending, subscriptions that are not essential, and changing phone and utility providers to less costly options.
Increase your earnings
Look for ways of increasing your profits by renting out part of your property, starting a side business if you have the time and resources, or speaking to your employer about possibly increasing your salary.
Common Mistakes Real Estate Investors Should Avoid
Top Real Estate Investment Mistakes and How to Avoid Them Real estate investment is one of the most powerful ways to build wealth in Australia.
Home Loan Statistics: January 2023
As interest rates rise, the property market has begun to cool down, and this trend, combined with a pullback in lending to first-home buyers, continues
First Home Loan Guarantee Scheme for Aussies
First Home Guarantee: Helping First-Time Buyers Enter the Market Sooner If you’re a first-time homebuyer eager to enter the market, the Australian government offers a
How Often Should I Refinance My Mortgage?
How often should You refinance Your mortgage? Here is the truth most lenders won’t tell you: Refinancing at the right time can save you tens
Big Four Banks Pass on Latest Rate Hike
Borrowers Face Higher Repayments Australia’s big four banks—NAB, Westpac, CBA, and ANZ—will pass on the latest 25 basis point interest rate hike. Borrowers won’t see
What is a Bank Overdraft and How Can it Affect Your Home Loan?
Having a bank overdraft facility on your loan can prove highly beneficial, enabling you to effectively manage and bridge temporary cash flow shortfalls. Several lenders
