Source: Forbes —
An estimated 800,000 home loans totalling $350 billion will fall off a ‘mortgage cliff’ this year when the loan switches from a fixed interest rate to a higher variable rate, according to estimates from the Reserve Bank of Australia (RBA).
More than one in five mortgage holders are at risk of experiencing mortgage stress due to ballooning monthly repayments that consume more than a third of their monthly income. A further 15% of households are considered “extremely at risk”, according to Roy Morgan research.
Another worrying term, ‘mortgage prison’, has also emerged to describe a situation whereby the mortgagee cannot refinance their mortgage and ends up trapped with the higher rate. That is to say, the mortgagee is earning the same amount as when they took out the mortgage, but thanks to rate rises, they cannot afford to repay the amount they owe. Recent analysis by KPMG reveals the potential scale of the mortgage cliff. KPMG Australia chief economist Brendan Rynne told The Age that as the average mortgage is now $600,000, a person faces a $16,500 after-tax increase in interest payments alone over 12 months once they roll off their fixed rate.
On February 7, the RBA raised interest rates for the ninth time in less than a year. Since a historic low during the pandemic of 0.1%, the cash rate is now 3.35%. Economists are predicting another one or two rate rises this year, and the RBA Governor Philip Lowe has foreshadowed the need for further hikes.
“Many people expected that rate hikes were coming, although I think the aggressiveness of the hikes has been surprising,” says Adele Andrews, director and finance and mortgage broker at Australian Property Home Loans.
Those most at risk of mortgage stress are first home buyers who bought a home in the last couple of years at a very high LVR [Loan-to-Value Ratio], because the amount outstanding is significant and increasing due to interest rate hikes.
What’s the Deal with Fixed Rates?
In Australia, a fixed rate typically lasts between one and five years.
“Over a 30-year mortgage, fixed rates generally turn out to be more expensive than a variable rate,” says CEO at Rate Money, Ryan Gair. “And with a fixed rate, you are hindered in terms of how quickly you can pay off the loan. A break-fee will be incurred if you want to pay it off early.”
