During the COVID-19 pandemic, the RBA dropped the cash rate to 0.10%. This led to many homebuyers entering the property market. CoreLogic data shows fixed-rate lending grew to around 64% of all home lending, from an average of 15%, before the pandemic.
A large number of people, as much as a whopping $270 billion in loans, will be coming off a very low fixed-rate loan in 2023, and onto much higher variable rates.
Some homeowners may face an increase in their monthly repayment of more than $2500. This steep, looming rise in repayments is termed a mortgage cliff or a fixed-rate mortgage cliff, and there is a huge worry that many may suffer from mortgage stress as a result.
How High Will Interest Rates Go?
At the end of 2022, the cash rate is at 3.10% and 5.04% is the average standard variable rate offered for a 30-year home loan by the big four. The banks expect a further rise in the cash rate. The big four forecasts are:
- Westpac and ANZ expect the cash rate to peak at 3.85% by May 2023
- NAB has the most conservative estimates out of the four. It expects the cash rate to peak at 3.6% by March 2023 and fall from March 2024 to 3.10%
- CBA forecasts the cash rate to rise to 3.35 in February 2023
The average variable interest rate is expected to peak at about 6.6% some time in 2023.
How Much Will My Interest Rate Increase?
Based on the forecasts, we can predict how much many borrowers’ monthly repayments will increase when they reach the mortgage cliff.Let’s assume a borrower had a fixed interest rate of 2% in April 2021 before the first interest hike. We’ve calculated how much the monthly repayments would be for different loan amounts before and after the fixed-rate term ends, if the borrower reverts to a standard variable rate of 6.6%.
| Loan Amount | Monthly Repayment Before The First Hike, April 2021 (2.00% Fixed Rate) | Monthly Repayment At Forecasted Cash Rate Of 3.85% (6.6% Variable Interest Rate) | Difference |
|---|---|---|---|
| $500,000 | $2,119 | $3,407 | $1,288 |
| $600,000 | $2,543 | $4,089 | $1,546 |
| $700,000 | $2,967 | $4,770 | $1,803 |
| $800,000 | $3,391 | $5,452 | $2,061 |
| $900,000 | $3,815 | $6,133 | $2,318 |
| $1 million | $4,239 | $6,815 | $2,576 |
Note: The loan repayments above were determined using our repayment calculator, based on a 25-year term.
How Do I Prepare For The Mortgage Cliff?
If you feel like you are about to fall off a mortgage cliff. Here are some things you can do to prepare for it.
- Do a budget to see if you can afford the new interest rate. You can do this by allocating your essential expenses and seeing how much cashflow you have remaining.
- Contact your broker at least two months prior to your fixed rate maturing so that you can start making plans ahead. If you do not have a broker, finding one would be very helpful for you, as they have the expertise to help you through the process.
- Try to find out your revert rate and negotiate with your bank to bring down your interest rate. You can check how much they offer new customers to help in the negotiation for a lower rate.
- You should start saving now to create a buffer to be on the safe side. A large savings will help greatly.
- Consolidate your debt. If you have many debts, such as car loans and credit-card balances, you can consolidate them into one loan. Check with your broker to see if your lender allows this. If you only have one set of recurring repayments with one interest rate, you’ll have better control of your money and a more precise timeline for when the debt can be paid off. It will also probably be cheaper.
- 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. Paying the same balance over a longer term result in lower monthly repayments. Before you do this, however, make sure you understand the risks. You will end up paying more over the life of the loan and you must be sure that you won’t retire and lack the means to repay the loan before the term ends.
- Look at refinancing options. Remember, however, that this option 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 be used to cover some of your discharge costs if your bank is unwilling to lower your rate.
- If you feel like you will not be able to make repayments, you can reach out to your lender’s financial hardship team. Any hardship request will take some time to process, so make sure to speak to them as early as possible.
- It would help if you cut down on discretionary expenses like
- Credit card debts. You can close credit cards that you do not use.
- Unnecessary spending. You may choose to spend wisely during this time to reduce your costs as much as possible. For example, eating at home instead of going out for lunch or dinner or putting off your travel plans for now.
- Close subscriptions that are not essential.
- Change phone and utility providers if there are less costly options.
- Look for ways of increasing your earnings
- Renting out part of your property
- Starting a side business if you have the time and resources.
- Speaking to your employer about possibly increasing your salary.
How Can Home Loan Experts Help Me Navigate The Mortgage Cliff?
We have an excellent customer care team that is always looking out for you.
- We have been contacting customers whose fixed-term loans are maturing and preparing them for the eventual change in their interest rates.
- We explore ways to create a buffer in our clients’ budgets so they can prepare for the rise in repayments and don’t feel imprisoned in their mortgages.
- We will help negotiate variable interest rates with clients’ lenders after their fixed term has expired. For those who are looking to refinance, we will explore the market for the most competitive interest rate.
Let The Experts Help You
This is a very trying time for homebuyers coming out of their fixed-rate mortgages, and we have been helping customers traverse the mortgage cliff. If you are worried, call us at 1300 889 743 or fill in our free online assessment form, to speak with one of our expert brokers today!