58.3% hike in store for super-low fixed-rate borrowers

The report — intended to educate borrowers on how the changing interest rate environment can impact their mortgage decisions and savings — flagged the “refinancing cliff” approaching many borrowers who took out super-low fixed rates during the pandemic and who will be soon rolling onto much higher rates.

For example, it highlighted that around two-thirds of fixed-rate mortgages are set to expire in 2023 (according to the RBA’s Financial Stability Review).

Moreover, around 46 per cent of all home loans in July 2021 were fixed-rate loans.

The report flagged that the RBA recently increased the cash rate by another 25 bps, taking the official cash rate to 3.1 per cent (or 300 bps higher than in April of this year, the fastest acceleration in rates since the 1990s). It therefore suggests that this would make new variable mortgage rates for owner-occupiers around 5.08 per cent through December.

As such, the report flagged that monthly loan repayments on variable rates are estimated to be around $960 higher than for those who took out low fixed rates in 2021.

Moreover, the Aussie/CoreLogic report went on to quantify what repayments would look like for these borrowers if the cash rate were to rise to 3.5 per cent next year.

By taking the median dwelling value and (and assuming the loan is for a 30-year loan term to purchase a property with a 20 per cent deposit), the report showed the difference between a low fixed rate repayment of 1.95 per cent versus the payment on an average new variable home loan rate. This is assumed to be 5.71 per cent by mid-2023, derived using the average new variable rate for owner-occupiers at October 2022 and adding the median forecast of the cash rate peak across the major banks, which was 3.73 per cent at October 2022.

It revealed that these borrowers would face a 58.3 per cent uplift in mortgage repayments across the capital cities and regions of Australia, ranging from a monthly repayment lift of $565 in regional South Australia to an increase in monthly repayments of around $1,918 in Sydney.

Even in Australia’s most affordable capital city, monthly mortgage repayments in Darwin could shift $863 higher per month for borrowers under certain conditions as the below table shows:

Speaking of the findings, Eliza Owen, head of research at CoreLogic, emphasised that those who took out a fixed-rate loan in mid-2021 would be at the highest risk of revert rate “sticker shock”. 

She said: “With the cash rate hitting its highest level in a decade yesterday, the number of mortgage holders increasingly pressed with  servicing their mortgage is likely to trend higher.

“Throughout 2023 this may result in more conversion of owner-occupied property to investment property, people taking on additional work, and potentially new highs in refinancing.

“We’re already seeing the nation turning to refinancing to achieve more flexibility or competitive pricing in home loans, with a record $19 billion in external refinancing secured through August.

“However with the bulk of fixed-term loans expiring over the year ahead, this will become more critical in order to ease the economic burden facing homeowners.”  

Brad Cramb, chief executive of distribution at Aussie, emphasised that the average new variable mortgage rate for owner-occupiers would be between 5–6 per cent through December, resulting in fixed-rate borrowers with expiring terms in 2023 facing baseline increases of around 3–4 percentage points.  

“However, in such a rapidly changing mortgage market, it’s often the case that the home loan many Aussies are sitting on, may no longer be the right one or the best available in the market for them,” he continued.

“For example, if you’re currently sitting at a home loan of $650,000 with a rate above 5–6 per cent, which is likely if you haven’t refinanced in some time there are refinance options available that could have you saving $519 a month, $6,000 across the year and $155,000 across the life of a loan — a significant saving for many households ahead,” adding that mortgage brokers can “support mortgage holders in finding the best option to meet their individual circumstances.

“Whether it’s working with them to reduce fees, refinancing to lower rates, no fee home loans or even taking advantage of cashback offers, there are many options available to relieve mortgage stress and anxiety, especially at this time.”

[Related: Brokers can’t help but take on customers’ rate stress: REA]