Mortgage ‘cliff’ looms for homeowners as fixed-rate loans end
When their fixed rate ends in July 2023, RateCity calculated that they would face an average ‘return’ rate of 5.68%, based on Westpac’s forecast for the official cash rate, which would see refunds increase by $937 per month. Even on the lowest estimated variable rate of 4.42%, monthly repayments would increase by $600.
Westpac expects the spot rate, currently at 0.85%, to peak at 2.35% by February, while financial markets predict it could reach 3% by year-end.
Grattan Institute economic policy program director Brendan Coates said people who had only recently purchased property would quickly cut back on spending in the face of higher interest rates, whether they were on mortgages at variable or fixed rate. This is partly because the amount of loans relative to income has increased dramatically over the past 30 years.
In April, the average mortgage was $611,000 nationally, according to data from the Australian Bureau of Statistics. In April 2012 the average loan was $350,000 and in 2004 it was $237,000.
“Buying a house in the early 1990s would certainly cost, say, three times the average income. And now it’s costing you something more than eight times, and that means, by its very nature, people are borrowing a lot more,” Coates said. “Therefore, it doesn’t take such a large increase in interest rates on this much larger loan for the mortgage to represent a significant portion of the borrower’s income.”
But Coates added that the people who bought during the pandemic were a minority of mortgage holders.
“COVID has been a very different experience for these two different groups of borrowers,” he said. “If you bought some time ago, you’ve spent the last three years with lower interest rates than you bought, only paying off a good portion of the mortgage.”
After the Reserve Bank’s biggest one-time interest rate hike in 22 years this week, ABC economists predicted property values could fall by up to 20% until the end of next year, which would bring the market closer to pre-pandemic values.
Coates said falling house prices made people feel poorer, which in turn reduced household spending.
“So that’s the main channel through which you could actually reduce household spending because they feel poor because their house has lost value,” he said.
While those with variable home loans would also see rate hikes, Tindall said their increase in mortgage costs would be more gradual. His concern is whether people were prepared for a rate hike shock.
“Sit down and figure out what your interest rate will be, but also what your monthly repayment will be,” she said. “If it doesn’t fit your current budget, start making changes to that budget now, so you can be prepared.”
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