How steep is the fixed-rate cliff?

According to the Reserve Bank of Australia (RBA), around one-third of the outstanding housing credit is for fixed-rate loans and approximately half of that — estimated to be around $350 billion over 800,000 loans — is rolling off this year.

The sheer scale of the number of loans coming off their fixed rate terms is eye-watering and comes after the wave of borrowers who took on two or three-year fixed rates at the beginning of the pandemic, when interest rates were at emergency pandemic settings.

But now, after a rapid rise in interest rates in the past year, these borrowers may be coming off their fixed-rate loan and rolling onto a variable-rate loan that is two or three times the rate they would have been paying on a fixed term (for example, coming off a 1.95 per cent fixed-rate loan to a 6.00 per cent variable-rate loan).

In fact, earlier this year, central bank governor Philip Lowe said he expects about half of all outstanding fixed loan debt to change to variable rates in 2023.

However, Mr Lowe said he didn’t like the analogy of it being a “cliff”.

Speaking at National Press Club address in April, he explained: “This is not a cliff; it’s kind of a ‘ramp up’. I mean, a lot of people have already transitioned their fixed-rate loans to variable-rate loans and the banks tell us that people who’ve already transitioned are performing as well with their mortgages as the people who have variable-rate loans.”

Indeed, National Australia Bank (NAB) has said that about $25 billion of NAB’s fixed-rate loans matured in the first half of this year, but another $50 billion is due to expire in this next half.

Speaking on a NAB Commercial Broker Economic Update in March, NAB’s chief economist Alan Oster said the peak will occur this month (June).

However, he noted that an additional $20 billion is expected to roll off into next year.

Mr Lowe has conceded that borrowers coming off their fixed rates “are going to face a difficult adjustment”, outlining that the 35 per cent of households with a mortgage either are, or will be, experiencing “a significant increase in their required payments”.

“This increase in mortgage rates has had a significant effect on household budgets and we anticipate that required mortgage payments will reach a new record high of almost 10 per cent of household disposable income by the end of next year,” he said.

However, he said that borrowers have “known for some time they have to pay higher rates”.

“Most people are sensible … they’ve been planning for it [the rise in interest rates],” Mr Lowe said.

“It doesn’t make it easier, but they’ve been planning for it. And the banks tell us that they’re working very carefully with those customers that make the transition and there’s been no deterioration in the credit quality of those borrowers.”

What does this mean for borrowers?

So, what does this all mean for home loan customers?

Australians who fixed their average-sized home loan two years ago are heading for a $1,250 hike in their monthly mortgage repayments, according to the Lendi Group.

Those who fixed their average home loans two years ago and are due to roll off their fixed rate in June will be faced with an approximate rate hike of 3.85 per cent when their fixed term expires, it said.

This jump in interest rates would equate to additional repayments of $1,250 a month, $15,000 a year, or $376,000 over the lifetime of the loan.

For those on a $1 million mortgage, that figure increases to $2,147 out of pocket every month.

With the official cash rate increasing to 3.85 per cent in May and more hikes likely, chief executive and co-founder of Lendi Group, David Hyman, said borrowers needed to urgently seek assistance from a broker.

“There are immense savings to be made, simply by starting the conversation with a broker,” Mr Hyman said, suggesting that Lendi and Aussie brokers are currently saving people an average of 65 bps through refinancing — a trend expected to continue to rise as refinance activity hits record-high levels.

Indeed, Aussie broker Alexander Ralec stated that he’s been in communication with customers every six months, including sending out text messages to clients whose fixed rates are about to expire.

“We’re trying to be proactive in getting in touch with clients each month so they can think about the next step,” Mr Ralec said.

“The mortgage cliff has already started with plenty of our borrowers, and thankfully we’ve been able to help pretty much all of them. All [others] have taken substantial pricing discounts and got their rates reduced.”

Kelso Finance Mortgage Brokers director Sandy Kelso also told The Adviser that she has been advising her clients to “focus on what they can control” such as building up savings and emergency funds; paying down any high-interest debt (personal loans, credit cards, etc); reviewing subscriptions, bills, and providers; and cutting down on consumer spending where possible.

“I have a clear view of when my clients are rolling off fixed and I proactively contact the client six weeks in advance to start getting next steps in place — new valuations, pricing discounts, comparison lenders, borrowing capacity etc,” she said.

Lenders have also been working quickly to help ease the shock for borrowers coming off super-low rates.

For example, non-banks such as Wave Money, Resimac, and AFG Home Loans all recently announced they would be reducing the serviceability buffer applied to home loans, to help more borrowers move into competitive loans (and avoid being ‘mortgage prisoners’, stuck paying higher standard variable rates at their existing lender).

Majors such as Westpac have also followed suit, with Westpac recently announcing it will apply a Streamlined Refinance Rate to certain borrowers, if an exception to the standard 3 per cent rate applies.

With ‘peak cliff’ now upon us and expectations rising that the central bank may increase the cash rate a few more times this year, it is therefore imperative for brokers to be reviewing their existing client base, ensuring they’re up to date with lender policies (and whether their borrower may be better suited moving to a lender with a lower serviceability buffer), and educating their clients on what to expect in the months ahead.

Given more than 70 per cent of home loans are originated by the broker channel, it’s up to this channel to save borrowers from falling off the cliff.