The cliff of fixed rates looms above the shoulders of many people who purchased a house during the outbreak at an initial fixed rate of as low as 1.95 percent. It’s normal for those who have a feeling of anxiety about the effects of increasing rates on their finances. Many are worried that it may lead to foreclosures on mortgages and impact the value of their homes. How serious is the threat? CoreLogic has recently published a study on what you need to consider about the fixed rate cliff. The key points from the report
Key Takeaways
- The term “fixed-rate cliff” is a reference to the time when the extremely low fixed rates of borrowers who took out loans during the pandemic are due to expire and they’ll need to refinance at more expensive rates.
- Around 35% of the outstanding housing credit is fixed terms which is around 800,000 loans and approximately two-thirds of them are due to expire by 2023.
- The repercussions of rate increases will be felt the most immediately from April 2023 because of the boom in housing beginning in April of 2021. Borrowers will notice dramatic changes in rates, as well as large remaining loan balances to be paid.
- Serviceability that is stretched (difficulty paying back loans) because of rate increases can be exacerbated by a rise in unemployment as well as higher cost of living because of inflation. This could result in distressed sales and further down pressure on the value of property.
- The majority of home loan debts have been subjected to hefty rates and the housing market has demonstrated the capacity to endure. Thus, the majority of fixed rate borrowers with comparable incomes to holders of variable rate loans are likely to be able to handle.
The fixed-rate cliff poses an extremely serious risk however, let’s look at the reasons why it shouldn’t need to be a disaster.
Why You Don’t Have To Panic About The Fixed-Rate Cliff
Variable Borrowing Has Shown Resilience
Mortgaged households show resilience. The amount of loans that are due in April 2022 could increase by $935 a month or more at the close of the year. But it appears that the Australian real estate market remained relatively steady despite increasing rates as new listings of properties being below the five-year average.
Fixed-rate borrowers should be able to handle rate hikes like variable rate borrowers due to their similar incomes, and have been capable of saving in offset and draw accounts. However, there’s an opportunity that some households with variable repayments may not have enough savings to protect themselves from rate increases in the future, and this could be the case for some fixed-rate borrowers as well.
Variable Rates Can Come Back Down
The majority of new home finance is being provided with flexible terms, with just 4.9 percent of loans being taken out with fixed terms December 2022. This means that the majority of outstanding home loans will be subject to the fluctuation of interest rates this year.
This increases the likelihood of serviceability issues when rates rise but it also means that those who borrow have a higher chances of getting an interest rate that is lower when the cash rate is at its highest point.
Although families may be faced with difficult conditions in the short-term due to the rising the variable rate, higher-interest loans aren’t expected to last the full period of their loans. Additionally, banks might be driven to cut their mortgage rates in order to stay competitive, particularly as the cost of external refinancing which allows your current lender with the option of refinancing the loan – is on record.
Most Markets Continue To Have A High Level Of Equity
Since April 2022 in the year 2022, the value of the average Australian house has dropped by 8.9 percent. But just 2.9 percent of suburban areas across Australia have experienced a decrease in house values that is greater than 20 percent from the peak, CoreLogic states.
Despite a drop in the value of homes in the last few months only a small percentage of borrowers have a house worth too small to cover their debt through selling it, because of the significant value gains over the last few years.
RBA Assistant Governor Brad Jones says only about 0.5 percent of homes have negative equity. If there is a 10% drop in the value of homes, RBA estimates that negative equity will increase by 1percent.
It Will Take Some Time To Observe The Effect
The head of research on residential properties Australia for Corelogic, Eliza Owen, says that any signs of trouble in the market for housing will take a while to be evident.
The latest information from APRA on non-performing loans indicates that just 1.0 percent in home loan loans have been in arrears with a minimum of 30 days. This rate has been declining. But it’s crucial to keep in mind that this figure dates from September 2022 prior to the time that the four most recent rate increases took place in February 2023.
Understanding how rising interest rates impact households is difficult because the responses to rising interest rates can differ among income categories and the support system. Many may relocate with their family members or lease out their home to pay the cost of their mortgage, whereas those with more money are able to afford spending the majority of their income on their house.
Financial institutions and banks will adopt measures to stop massively sized defaults in the mortgage market, including providing loan term extensions, or short-term interest-only payments.
Thus, while those who have fixed rate loans might experience a few difficult adjustments, there’s no reason to be in a panic. Instead, making informed choices and weighing the different alternatives available to deal with the higher cost of interest is essential. If you’re preparing to take on the fixed rate cliff, check out the page on the mortgage risk page to learn more about how to prepare.
