Should I be worried about the fixed rate mortgage cliff?
5 min read
What is the fixed rate mortgage cliff and should I be worried?
If you have a fixed rate mortgage that you locked in prior to May 2022 then you would know you locked this in at a record low rate – in some cases less than 2% for two+ years. Because of the rapid increase in interest rates since then, many borrowers are now ending their fixed rates and entering a much higher rate environment. In some cases rates are up to three times higher than the fixed rates they were on previously.
This is the mortgage cliff that many in the media are referring to. The biggest concern is that many Australians will be unable to afford their loan repayments given the big jump in repayments thanks to the increase in interest rates. This will result in an increase in mortgage arrears and defaults, people may even have to sell their property.
Mortgage arrears and the mortgage cliff
According to data released by Fitch Ratings in September 2023, 30+ day mortgage arrears were 1.07%, admittedly an increase of 11bps over the quarter. Mortgage arrears (being behind on loan repayments) provide an indication of mortgage stress across Australia. Currently just over 1% of homeowners are behind on their loan repayments. To put that into perspective, over 98% of mortgage holders are not in arrears.
Most people are already on a higher rate
What a lot of the media reports are neglecting to mention in all of the noise and scare tactics and hype, is that 80% of home loans in Australia are on variable rates. This means over 80% of the market has been exposed to higher rates already over the past 12 months. This means the mortgage cliff that is being talked about, has for the most part already occurred.
Rates go up, rates go down
Another important consideration is that yes, variable rates have gone up, but they will (eventually) also go back down. Some economists are also saying the RBA need to tread carefully, as if they keep pushing the cash rate up so aggressively, the result could be a recession. In the four months from July the RBA has kept rates on hold. Some economists are predicting one more rate rise in 2023 and all of the big four banks believe rates will be on hold and may even drop again throughout 2024.
Make a budget – stick to it
The sensible advice our brokers are giving clients who are concerned about the mortgage cliff, is to create a budget and stick to it. Some top budgeting tips include:
- Reduce your discretionary spending. That’s on things like clothes, homewares, eating out and beauty/grooming.
- Boost savings to ensure you have a buffer of funds.
- Try paying your home loan off at a higher rate than the minimum. Whatever the current variable rate is at your bank, test out your repayments at that rate and see how your budget is affected prior to the end of your fixed rate.
- If you have savings, place these in your offset account to reduce interest payable.
- Put aside your loan repayments and savings first, then the rest of your spending comes from what is left.
Your broker will also be able to help you understand how high rates can go before they start impacting your affordability. This will help inform you at what point you will need to consider other options.
The key takeaway
The key takeaway we’re trying to provide here is that you should take a balanced approach to your finances and if you are worried or feel you are facing something that is going to be unaffordable, then speak to your broker as early as possible. There are options open to you and a good broker like Entourage can help you understand forward projections of budget, rate and affordability; provide options to negotiate or refinance your loan and most importantly help you make the right decision for your situation.