The “Mortgage Cliff” and what to do about it
Concerns about a fixed rate “mortgage cliff” are growing stronger in the aftermath of the Reserve Bank of Australia’s (RBA) string of interest rate increases.
As the name implies, it is a phenomena that affects homeowners who purchased a property and took out a fixed interest rate mortgage. According to the RBA, this so-called “cliff” will affect hundreds of thousands of Australians in 2023 and the couple of years beyond.
So, what exactly is the mortgage cliff, and how might it impact you this year?
Climbing the mountain
Many Australians took advantage of the RBA cash rate’s historic low of 0.1 percent in November 2020 by arranging a fixed-rate loan to buy property.
As rates plummeted between 2019 and 2022, a record number of homebuyers joined the market and acquired short-term fixed loans. According to CoreLogic data, fixed-rate lending dramatically increased to about 64% of all home financing, up from an average of 15% prior to the epidemic
Reaching the summit
Because the rate is only fixed for a limited period (usually three to five years in Australia) many people are about to be hit hard by all of the recent interest rate hikes all at once.
In February 2023, Marion Kohler from the RBA’s economic research department told a Senate Select Committee that the number of fixed-term loans that would end in 2023 “… is somewhere in the high 800,000s.” It didn’t add to a sense of calm when Kohler added that this number was a “very rough back of the envelope” calculation.
Most borrowers will be aware of the recent interest rate increases, and that their short-term fixed-rate mortgage will eventually come to an end. People have had a bit of time to plan for the transition to a higher variable rate. Individuals, though, can only do so much.
With fixed-rate borrowers facing monthly payback increases of $1000 or more, many borrowers are worried that they may no longer be able to afford their mortgages. If interest rates move as expected, most market observers think that a household with a $800,000 loan will spend more than $2000 extra each month. Ouch.
Over the cliff … or not?
While some borrowers may default on their mortgages, the majority are likely to tighten their belts, to use an oft-heard phrase, and cut back on other spending to afford their repayments. It’s still a tough ask for people to suddenly find many hundreds of dollars a week being wasted on streaming services or take out.
Aside from skipping the holiday this year, here are a few other options available to avoid defaulting on your loan:
- Consider taking out a new fixed-term loan
- Your broker will work with you to see if this is in your best interests.
- Split your loan
- Your broker can check if your lender can offer a combination of fixed and variable loans to control the initial shock
- Request a better offer
- Most lender have discount-rate loans if you forgo added extras such as linked cards and offset accounts.
- Refinance with a different lender
- “churn” is big at the moment, so some lenders are offering sweeteners to attract people who need a better deal.
Our expert brokers here at Mortgage Broker Melbourne can help you with any and all of these options at no cost to you. (Lender fees and charges may apply).
If you’re bold, you could also tackle the problem from the other direction:
- Increase your earnings
- negotiate for a wage increase with your employer
- take advantage of the “great resignation” and low unemployment by looking for a better-paying job
- diversify: turn your pottery hobby into an online ceramics business.
If your fixed loan is ending soon, we can help. Negotiating with your current lender or refinancing are great options, and we can help you find the best deal for your circumstances.
The worst thing to do is to do nothing. Our services are free to you, so contact us soon to see how we can turn that cliff jump into a soft landing.
Marc has been a professional lender for 28 years. After beginning his career in 1990 with a UK Building Society, he moved to Australia where he held several different retail banking roles. In 1999 it became clear to him that a mortgage broker would eventually become an obvious choice for someone looking for a home loan so he took the plunge and became an independent broker. He hasn’t looked back since!