Thousands of low fixed-rate loans coming to an end as ‘mortgage cliff’ looms

Based on data from the Australian Bureau of Statistics and RBA, Australian borrowers coming off a fixed rate and onto a variable rate could see their mortgage repayments increase by $1,231 a month. 

This calculation is based on the average owner-occupier loan size of $584,975 in April 2023, with principal & interest monthly repayments on a 30-year loan term, using a fixed rate of 2.00% increasing to a variable rate of 5.91%. The example assumes two additional interest rate increases of 25 basis points each, passed on in full.  

PropTrack Senior Economist Paul Ryan said the number of households switching from a fixed-rate loan to a variable rate was unprecedented. 

“We've never seen this number of households on fixed rates before, and we’ve never really seen such a large jump from a fixed rate to a variable rate,” he said. 

“People going from 2% mortgages to rates around 6.5% to 7.5% - we’ve never seen that. We saw a lot of rollovers from fixed to variable rates late last year and in the first half of this year, and so far, that hasn’t translated to higher numbers of loans in arrears, or significant numbers of forced sales.  

“This tells us that households that have rolled over to date have weathered the storm well so far, but there are a lot more rollovers still to come.” 

Mortgage Choice franchise owner James Algar said he is seeing different types of borrowers coming off low fixed-rate loans.  

“There are those who have had their home loan for a long time and took the opportunity to lock in those low rates while they were available. These borrowers are returning to what is for them a more normal rate – they have paid interest rates in the sixes before,” he said. 

The other contingents are borrowers who purchased property in the last three years at lower rates, and others who took advantage of lower rates to refinance and use their home equity for renovations. 

“People who increased their level of debt when they took on their fixed-rate loan are very aware of what’s coming and are anxious about it,” he said. 

“The advice for people who are returning to these more normal rates is that they should sit down and question if they are getting the best deal for their situation. The brokers in our business are very much involved in renegotiating rates and seeing if there is an opportunity for our clients to move elsewhere to secure a better deal. 

“While some borrowers looking to refinance are keen to reset their base line, most are saying, ‘Even if my interest rate is not made significantly cheaper by refinancing, we can slope out the term, which will lower our minimum payments for the next couple of years while interest rates are possibly higher,’ and their plan is to play catch up once we are over the peak of this.” 

The property market has so far been incredibly resilient to higher interest rates, Mr Ryan said, but there was the possibility of future downward pressure on prices as low fixed-rate loan periods come to an end.  

“That's a scenario a lot of people are concerned about in the markets, but we haven't seen any evidence of that yet,” he said. 

“If people are forced to list property, that will put downward pressure on prices. My expectation is that we won’t see a large number of distressed sales.”