What is a mortgage cliff?
Over the last three years, many borrowers opted to take advantage of the historically low interest rates and enter into a fixed-rate home loan.
Now, as we approach mid 2023, with many of this fixed loan terms set to expire, these borrowers are facing significantly higher repayments as their home loans revert to their lenders standard variable interest rate.
You may have heard this dramatised in the media as a “mortgage cliff”. Which is simply a phrase more accurately described as a change in mortgage rate structure that will see a progressive rollover of mortgages from fixed interest rates to variable rates, due to occur over the next two years.
Who will be effected?
Everyone who is coming out our a fixed term home loan by the end of 2023 (one-fifth of all Australian home loans) is likely to be facing some level of increase in their repayments. Some will be more prepared for this than others. That is the key word here. Preparation. Nothing ever lasts forever, and fixed rate loan terms will always expire. It’s an important consideration for borrowers that might be looking to fix their loan to consider how they can prepare for a change in repayments at the end of their fixed term.
However, a report from the RBA released last week showed the borrowers most at risk when coming off ultra low rates were first home buyers, those who have larger loans compared to their income and homeowners with less equity.
The RBA have suggested that this large increase in repayments faced by borrowers with expiring fixed term loans is one of the factors expected to contribute to slower household consumption in the period ahead.
It found that one-in-four borrowers who have come off fixed rates and on to higher variable rate repayments are now spending more than 30 per cent of their income on mortgage payments – a measure used as an indicator that borrowers may experience financial difficulties.
How can you be prepared for a mortgage cliff?
As I said, preparation is key to mitigate any impact of the mortgage cliff may have on you. Here are a few ideas to consider:
1. Calculate the difference in repayments
Try to figure out how much your monthly repayments might increase by if your loan reverts to your lenders standard variable rate. This will help you to budget and make any required adjustments to your monthly outgoings.
2. Refinance your home loan
This is something really proactive you can do to minimise any major financial pain. Talk to us about changing your loan structure to another fixed-rate product, or changing lenders altogether. With over 2000 borrowers refinancing every day, the lenders are being very competitive and offering a lot of incentives in order to keep or attract business. Chances are, you will be able to secure an interest rate that is more competitive than your lenders current standard variable rate, and a loan product that will be suitable for your current financial situation.
3. Scrutinise your spending
If, for some reason, you’re unable to refinance your home loan, you may need to look at your current outgoings and curb any non-essential spending. You could also consider if you have the potential to take on additional employment or add another income stream to your household.
How can a mortgage broker help?
In times like this, mortgage brokers are exceptionally useful to help people to find solutions that they may not be able to find by themselves and to simplify the process in what might feel like a stressful circumstance for some.
We are here to help you understand your options, compare home loans, and negotiate with lenders on your behalf. Ideally, you should reach out approximately three months or so before your fixed rate loan is expiring.
If you’d like to discuss your options Click here to get in touch today.
All lending subject to status and lenders criteria. Terms & conditions apply. This document contains general information only. Your own personal circumstances have not been considered and you should seek independent financial advice prior to making any decision on a financial product.
