The fixed rate ‘cliff’
Most property owners will have recently heard the saying ‘fixed rate cliff’. In 2023 around 23% of all mortgage debt in Australia will come off record low fixed rates, with most of the hurt expected from April. The mortgage repayment increase coming is a really significant one.
Let’s take a look at what to expect at both the macro and micro level, and your options to limit the impact.
Historically about 15% of new housing loans are fixed, however given extremely low fixed rates this figure hit 46% in July and August 2021, and in total about 35% of all outstanding housing debt was fixed at the time.
With nearly a quarter of the entire housing market being re-priced in 2023, there is a lot of angst amongst both economists and mortgage holders, and hence the saying ‘fixed rate cliff’.
During early and mid 2021 most people were locking in at close to or under 2%. In most cases the interest rate at fixed expiry will revert to around 6%, especially if they don’t take any action.
Whilst banks ‘acquisition’ rates may be as low as 5.3%, most commonly the variable rate people find themselves on after a fixed period is much higher, and the first thing that should be looked at on fixed expiry.
If we look at the repayment figures on a $1 million mortgage over 30 years, coming off a fixed rate of 2% onto a variable rate of 6%, the repayment will jump from $3,696 to $5,864. That’s an increase of $2,168 a month, being a 58% jump.
Whilst not everyone has a million dollar mortgage, the impact is seen for all mortgage holders and the repercussions on household cash flow and the economy will be felt.
So what do you need to do when you’re approaching a fixed rate expiry? The below steps out the best course of action and what options should be considered.
Request a rate review with your existing bank. The rate you revert to is buried somewhere in the contracts you signed however many years back. With some banks you’ll revert back to essentially what their acquisition rate was when you got the loan, plus the RBA cash rate increases between now and then. Other banks simply roll you back to their standard rates without any discount applied, which are generally well above market. Give the bank a call, see what they’ll do, then use this as the baseline when considering your options. Note - if you did the loan with a broker, they’re able to do this for you.
Have your broker compare pricing with other leading options. Give some consideration to what your finance needs are now versus then, and also to changes in property values and what impacts or opportunities this may bring.
Ensure that loan structure and features are optimised. Important questions to answer include; Is investment debt properly structured for tax deductions? Are offset features properly leveraged? Do loan terms align to property strategies?
Consider re-fixing your loans. Whilst very circumstantial we’re seeing more interest in current fixed rates. They’re higher than variable rates, conversely to the mid 2021 period, however for those who seek certainty in what are very uncertain times, there is value coming back into the market. As always, be sure to speak with your broker about the practicalities of any bank's fixed rate loans.
If you need guidance dealing with your fixed rate expiry, we’re always here to help.
