During the COVID-19 pandemic, interest rates plummeted as the RBA dropped the cash rate to 0.10%. Low rates allowed many homebuyers to enter the property market or refinance to a low rate. CoreLogic data shows that fixed-rate lending grew to around 64% of all home lending during the pandemic, up from from an average of 15% in the years before.
This year and early 2024, after no less than ten rate rises, a large number of people, with a combined whopping $270 billion in loans, will be coming off their very low fixed-rates, and onto much higher variable rates. Some homeowners may face an increase in their monthly repayment of more than $2500.
This massive spike in repayments is termed a mortgage cliff or a fixed-rate mortgage cliff, and there is a huge worry that many people could suffer from mortgage stress as a result.
The current official cash rate as determined by the Reserve Bank of Australia (RBA) in March 2023 is 3.60%. At the time of writing, the average variable rate on finder.com was 5.61% – with many predicting the average variable interest rate to peak at about 6.6% some time in 2023.
How Much Will My Interest Rate Increase?
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 |
*repayments are based on a 25-year term
How Do I Prepare For The Mortgage Cliff?
The mortgage cliff can be particularly challenging for anyone who has taken on high levels of debt or has experienced a change in their financial circumstances, such as a reduction in income or an increase in expenses.
To prepare for the mortgage cliff, homeowners can take steps such as reviewing their current home loan, exploring their refinancing options, and seeking expert advice. The Loans Suite can help homeowners navigate the mortgage cliff by offering expert guidance on refinancing options, providing access to a wide range of lenders, and helping homeowners to assess their financial situation and plan for the future.
Here are three things you can do today
- Use our mortgage stress calculator to see if you can afford the new interest rate or how far rates would need to move before you are in mortgage stress.
- Contact your broker at the loan suite at least two months prior to your fixed rate maturing so that you can start making plans ahead. Don’t have a broker with us yet? Call us and we will organise a complimentary discovery session so we can get to know you and show you how we can help.
- Do a budget and start saving now to create a buffer. A large savings will help greatly. You can build up savings by;
- Paying off and close credit cards that you do not use, if you can afford to do this.
- Cutting any unnecessary spending
- Closing any subscriptions, including phone apps, that you do not use or need
- Reviewing any insurance policies or utility providers to make sure you are getting value for money, if not, consider switching to a better deal.
- Look for ways to increase your earnings:
- Start a side hustle
- Ask your employer about possibly increasing your salary
- 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.
- 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.
