The fixed-rate cliff, a term that has become colloquially known in the Australian financial landscape, is a subject that's been garnering attention lately.
With over $100 billion in fixed-rate mortgages set to expire by the end of the year, it's time to delve into what lies on the other side of this cliff.
The Fixed-Rate Cliff: An Overview
Proptrack senior economist Eleanor Creagh aptly poses an interesting question in her regular weekly article.
She asked.
"What's on the other side of the fixed-rate cliff?"
And that’s a great question as after a 4% increase in interest rates across 12-step changes, it's time to take stock of what's on the edge of this so-called cliff.
Who's at Risk?
Creagh explains that just over a third of Australian households (35%) have a mortgage.
The remaining two-thirds are divided between renters (31%) and homeowners without a mortgage (32%), with the latter group not having to worry about increased mortgage servicing costs.
The Rise of Fixed-Rate Borrowing During the Pandemic
According to Creagh,
"Fixed rate borrowing increased significantly during the pandemic when the RBA’s term funding facility allowed banks to offer ultra-cheap fixed-rate mortgages."
This led to many borrowers taking advantage of historically low fixed mortgage rates, with the fixed share of outstanding loans almost doubling to about 40%.
Estimated increase in mortgage repayments
| Capital city | Median value | Loan size | Estimated $ increase in monthly repayments since May 2022 | Estimated annual $ change |
|---|---|---|---|---|
| Sydney | $1,019,000 | $815,200 | $1,883 | $22,596 |
| Melbourne | $797,000 | $637,600 | $1,472 | $17,664 |
| Brisbane | $725,000 | $580,000 | $1,339 | $16,068 |
| Adelaide | $660,000 | $528,000 | $1,219 | $14,628 |
| Perth | $571,000 | $456,800 | $1,054 | $12,648 |
| Hobart | $663,000 | $530,400 | $1,225 | $14,700 |
| Darwin | $497,000 | $397,600 | $918 | $11,016 |
| Canberra | $836,000 | $668,800 | $1,544 | $18,528 |
| 500K Mortgage | n/a | $500,000 | $1,155 | $13,860 |
The Expiry of Fixed-Rate Loans
In her article, Creagh states that,
"RBA analysis estimated that about 880,000 fixed-rate loans would expire in 2023."
Most of these expiries are occurring in the second half of the year, leading to sharp increases in repayments for borrowers.
“Exactly how much depends on the original fixed rate, the timing of expiry and ability to refinance with a different lender but most will see repayments increase by a minimum of 30%.”
The Peak of the Fixed-Rate Cliff
With the bulk of this expiry occurring across July, August, and September, close to $30bn in fixed-rate loans will expire each month across the four major lenders.
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However, there are promising signs that this will not lead to a deluge of forced sales, thanks to strong labour market conditions and other factors.
Creagh explains,
“There are promising signs that this process, while no doubt challenging for many households, has not yet and will likely not bring the deluge of forced sales that some have forecast.
“Household finances are supported by the strong labour market conditions with the unemployment rate holding close to multi-decade lows and wages growth slowly increasing.”
Impact on Households and Consumer Spending
The article emphasizes that,
"Consumer spending has slowed materially and is expected to continue to do so as the substantial tightening already pushed through catches up as we pass through the peak rate of rollovers."
Buffers and Safety Nets
Based on the loan book of our largest home loan lender, the Commonwealth Bank, close to 4 out of 5 borrowers are ahead on their repayments with almost half of borrowers at least 6 months ahead.
Other buffers include large value gains, savings buffers, and cooperation from lenders to avoid mortgagee selling.
The Conclusion: A Less Steep Cliff
Creagh concludes that provided the unemployment rate does not rise significantly, the cliff will be much less steep than speculated.
"It's inevitable that households with fixed-rate loans will experience a difficult period of adjustment and resilience will be tested as we pass through the eye of the storm.
But there are many factors that suggest that the majority of households have some protection against future financial stress driven by the sharp move higher in interest rates."
