Mortgage cliff could raise repayments by 63%

An analysis by financial comparator Canstar has found that fixed-rate borrowers falling off the mortgage cliff might see repayments rise by up to 63 per cent as the 4 per cent increase in the cash rate over the past year is absorbed.

Billions of dollars of fixed-rate loans have been rolling off super-low fixed-rate terms back when the cash rate sat at the emergency low level of 0.10 per cent between November 2020 and April 2022.

According to the Reserve Bank of Australia (RBA), around one-third of the outstanding housing credit is for fixed-rate loans and approximately half of that (estimated to be around $350 billion over 800,000 loans) is expected to roll off this year.
The vast majority of fixed-rate loans will expire between June to September 2023.

According to Canstar, borrowers who took out a two-year fixed-rate loan in 2021 at 2.21 per cent could see repayments on a $500,000 loan rise by $1,200 (or 63 per cent) to reach $3,101 per month based on the current average variable rate of 6.57 per cent.

Similarly, borrowers who chose to take out a three-year fixed-rate loan in 2020 and locked into an average rate of 2.61 per cent could face a 53 per cent increase to repayments, with monthly repayments on a loan of $500,000 rising from $2,004 to $3,074.

Canstar group executive, financial services, and chief commentator Steve Mickenbecker said those facing the fixed-rate cliff are in for “an unprecedented hit to their finances”.

“Fixed-rate borrowers have not had the past year to acclimatise to higher interest rates,” Mr Mickenbecker added.

“They have avoided the pain of adjusting their budget for higher loan repayments but will be on the receiving end of the Reserve Bank’s 12 cash increases over the past year all in one huge hit.

“To help cope with the inevitable higher repayments, any borrower with a fixed period still to run should be making the necessary adjustments now and be putting themselves ahead with extra repayments.

“The position of borrowers will deteriorate even further if the Reserve Bank continues to lift the cash rate over coming months, as expected by a couple of the major banks.”

Mr Mickenbecker further stated that the latest inflation numbers are “encouraging and probably enough” to allow the RBA to hold in July.

However, if the quarterly inflation data released in July doesn’t confirm the trend towards the RBA’s 2–3 per cent inflation target, further hikes can be expected, according to Mr Mickenbecker.

“The labour market is very tight with the lowest unemployment rate in decades and this will feed wage pressure into the inflation rate. It doesn’t look as if the Reserve Bank’s job is done yet,” Mr Mickenbecker said.

[RELATED: Inflation falls, but is it enough to hold rates? Economists ask]

Adrian Suljanovic is a journalist at Broker Daily with more than two years experience reporting on all facets of the third party distribution channel.

Adrian has written for a range of business and finance titles including IFA, Investor Daily and Lawyer’s Weekly before joining the mortgages team in 2022.

He graduated from the University of Wollongong in 2021 gaining a Bachelor of Communication & Media with a major in Digital & Social Media.

E-mail Adrian at: This email address is being protected from spambots. You need JavaScript enabled to view it.