How borrowers can find a softer landing as they face the mortgage cliff

The first step to navigate looming higher mortgage payments is to speak to your current lender, AMP chief economist Shane Oliver said. 

“I think the key is to have a chat with the bank; banks don't want people to default because that's a problem for them as well. Banks are geared to helping people on this front with financial wellbeing assistance available,” he said. 

Approaching your bank for a lower interest rate was worth trying, Mr Oliver said. 

Many households were aware a “big financial pinch” was looming, with many record-low fixed-rate loan coming to an end in the next six to 12 months, PropTrack senior economist Paul Ryan said. 

“The best way to prepare for higher repayments is to get in early and consider what your new expenses are going to be,” he said. 

He recommended reviewing areas where spending could be cut back, for example taking stock of spending on entertainment subscriptions, and perhaps to consider options to increase your income. 

“One of the things that is working in households’ favour at the moment is that the labour market is tight, so while interest rates are going up, it's never been a better time to apply for a new job,” he said.  

Mortgage Choice franchise owner James Algar said he has been speaking to mortgage holders well in advance of when their fixed rate was due to end, which ranged anywhere from three, four to six months.  

“Now is the time for borrowers to get comfortable with their new budget and to start living life as if their payments have already come off the fixed rates,” he said. 

“Because in the meantime if they are already paying extra on their mortgage, or they are building up a ‘war chest,’ when their repayments jump, they have bit of a cushion if it takes a while to adjust,” he said. 

“By and large, the more difficult conversations are with people who have taken on a greater level of debt over the past three years. 

“With these borrowers, we are having a real conversation about what has changed in their world income wise and getting back to basics with budget.” 

With some banks still offering cashback deals to switch, Mr Algar warned borrowers to be mindful. 

“Cashbacks are a bit of a sugar hit now, but in nearly every case when someone refinances, if they are taking a cashback, they are nearly always pushing out their loan term,” he said. 

“You should not just be refinancing just for the cashback – banks are good at making money, so there’s always a payback somewhere.” 

While some people will be able to cut back on their spending and survive higher mortgage repayments, borrowers who believe they are at risk of defaulting should contact their bank well before that happens, Mr Oliver said. 

“Your bank could switch you to an interest-only loan, which will mean a substantial reduction in your payments; of course, this strategy does come with long-term costs because you potentially have a mortgage for longer, or your repayments will be higher for longer, so you'll end up paying more on your mortgage. 

“But it may be sufficient to get someone across the line through this period of high rates.  

“Most economists are assuming that some time through next year the RBA will start cutting rates again as the economy cools and inflation falls. So, if you can hang on into next year then you might find some relief.”