Interest Rate Surge: $100 Billion in Fixed Mortgages Set to Expire by Year-End


With just four months remaining in the year, the colloquially termed “fixed-rate cliff” is now passing its midway point. Over $100 billion in fixed-rate mortgages are set to expire by year-end.

After a 400-basis point increase in interest rates across 12 incremental steps, we assess the situation at the edge of this so-called cliff.

Firstly, who is most vulnerable? Roughly a third of Australian households hold mortgages (35%), while the remaining nearly two-thirds are evenly divided between renters (31%) and homeowners without mortgages (32%). The latter group doesn’t need to concern themselves with the impact of significantly higher mortgage servicing costs. During the pandemic, fixed-rate borrowing surged, thanks to the RBA’s term funding facility, which enabled banks to offer extremely low fixed-rate mortgages.

Many borrowers seized the opportunity of historically low fixed mortgage rates, causing the proportion of outstanding loans in fixed rates to nearly double to approximately 40%, though variable-rate loans still dominated.

RBA analysis predicted around 880,000 fixed-rate loans would expire in 2023, with most reaching their expiration in the latter half of the year. Borrowers with expiring fixed-rate loans are bracing for substantial increases in their monthly payments. The exact increase varies based on the initial fixed rate, the expiration timing, and the ability to refinance with a different lender (as most lenders offer new customers their most competitive rates). Nevertheless, most will experience at least a 30% hike in repayments. We are currently at the peak of the fixed-rate cliff, with the bulk of these expirations concentrated in July, August, and September, totaling nearly $30 billion in fixed-rate loans per month across the four major lenders.

There are encouraging signs that this process, while undoubtedly challenging for many households, may not result in the flood of forced property sales that some had anticipated.

Strong labor market conditions, with an unemployment rate near multi-decade lows and slowly increasing wages, provide support to household finances.

The larger group of borrowers with variable rates has already weathered the tightening that has occurred so far, without any noticeable surge in distressed property sales or mortgage arrears.

Undoubtedly, the swiftest tightening cycle in a generation has impacted households, with mortgage payments as a share of household disposable income reaching historic levels. However, most homeowners tend to prioritize their mortgage repayments over discretionary spending or selling their homes.

Consumer spending has significantly slowed and is expected to continue doing so as the substantial tightening catches up with the peak rate of loan rollovers. This is one of the reasons behind the recent stabilization in interest rates.

Lenders’ serviceability assessments, which account for higher interest rates, also offer a safety net. The beginnings of the “fixed-rate cliff” emerged due to stricter lending standards enforced through various prudential measures in recent years.

Additionally, many borrowers have built up savings buffers to cushion the impact of rising interest rates. This process has been well-communicated.

Based on the loan book of Australia’s largest home loan lender, the Commonwealth Bank, nearly 4 out of 5 borrowers are ahead on their repayments, with almost half of them at least 6 months ahead. A third of these borrowers have a repayment buffer of more than 2 years. However, due to pressures on disposable incomes, these flows are lower than pre-pandemic averages and may not represent those with fixed-rate loans. Another buffer comes from substantial property value gains in recent years, enabling many borrowers who refinance to reduce their loan-to-value ratio, partially offsetting the increase in servicing costs.

There’s no doubt that the “mortgage cliff” poses challenges for a segment of borrowers, especially those with lower incomes. For the few borrowers lacking these safety nets and having low savings buffers, lenders are expected to collaborate to prevent mortgagee sales. Just as repayment holidays were offered during the pandemic, dedicated hardship teams will explore potential loan restructuring options such as longer terms, interest-only periods, or temporary payment suspensions.

As long as the unemployment rate doesn’t rise significantly beyond expectations, the cliff’s impact is likely to be less severe than some have feared. Listings entering the market have been limited during the first half of the year, providing little evidence of a substantial increase in motivated sellers. This situation has started to change in Sydney and Melbourne in July, but the uptick in listings is largely attributed to previous weaknesses and improving confidence, with interest rates stabilizing and property prices continuing to rise.

According to the Australian Prudential Regulation Authority (APRA), non-performing loans and 30-day arrears remain exceptionally low compared to historical averages and well below pre-pandemic levels until the quarter ending on March 31, 2023.

It’s reasonable to expect some increase in arrears in the coming months, given the sharp rise in mortgage servicing costs. However, thus far, the predominant consequence in the housing market has been a refinancing boom.

While households with fixed-rate loans will undoubtedly face a challenging adjustment period, several factors suggest that the majority of households have some safeguards against future financial stress due to the significant increase in interest rates.

To gain a better understanding of housing prices on the Gold Coast and determine the potential value of your property, consider taking action and scheduling a property appraisal today. Don’t miss out on the opportunity to stay informed and make informed decisions about your property. Contact us below to get started.

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