A mortgage cliff is looming: what can Australians do?

If you’re one of the more than 1.3 million Australians who will be forced to move from a fixed interest rate home loan to a variable interest rate loan this year or next, it’s understandable that you may be worried about a mortgage cliff.

While people on variable interest rate home loans have been enduring interest rate rises and increases to their mortgage repayments incrementally over the past year, those facing the mortgage cliff will be hit with a year’s worth of interest rate increases (or more) literally overnight.

This change from a low interest rate loan to a much higher one – and the subsequent sharp increase in home loan repayments – is a situation facing 880,000 Australians in 2023 and another 450,000 in 2024, according to the Reserve Bank of Australia (RBA).

What is a mortgage cliff?

The phrase ‘mortgage cliff’ describes the mortgage crisis some Australians may be facing now that their fixed-rate home loan terms have ended or will be ending soon.

This means they will be transitioning from paying a low fixed interest rate on their mortgage to a much higher variable interest rate.

Unlike a fixed interest rate loan, under which the rate of interest is set and can’t be changed for the term of the loan, the interest payable on a variable interest rate loan can be increased, or decreased, by lenders – usually in line with changes the RBA makes to the official cash rate.

Thanks to 12 interest rate rises from the RBA since May 2022, the official cash rate has jumped from 0.1% in April 2022 to 4.1% in June 2023.

At the lowest point, a fixed-rate home loan of less than three years could be secured at an interest rate of less than 2%. By contrast, the average variable home loan interest rate in May 2023 was 5.61% according to comparison site Finder, with many well above 6%.

The average home loan issued between 2020 and 2022 was for $550,000. At that level of borrowing, coming off a fixed rate of 2% and onto a variable rate of 6% would result in a $1,212 increase in the monthly mortgage repayment.

Overall, the RBA estimates that mortgage repayments will increase by at least 30% for 90% of people rolling off fixed rate loans during 2023 and 2024.

What has led to this mortgage crisis?

During the COVID-19 pandemic, interest rates were at record lows as the RBA was concerned that the pandemic would decimate the economy.

As part of its support to banks during this time, the RBA provided them with cheap access to three-year fixed rate credit, which the banks then passed onto consumers via cheap, fixed rate home loans. Many people took advantage of this by taking out two-to-three year fixed rate loans, either for new properties or refinancing existing mortgages.

Their confidence in this strategy was also boosted by comments made by RBA governor Dr Philip Lowe in 2021 that interest rates were unlikely to increase until 2024.

Such was the popularity of fixed rate loans that by mid-2021 they represented about 45% of all new mortgages by value, compared to an average of around 15% before 2020.

Will interest rates go down in 2023?

Australia’s big four banks are split on their forecasts about how high interest rates might climb, when interest rates will go down and where they will finally land.

Both the Commonwealth Bank of Australia (CBA) and Westpac believed the cash rate had peaked when it hit 3.85% in May. CBA is predicting the first interest rate cut will occur in November 2023, while Westpac is forecasting that interest rates won’t begin to go down until February 2024.

National Australia Bank (NAB) thinks interest rates have now peaked with the increase to 4.1% in June, while ANZ is forecasting a further rate rise to see interest rates hit 4.35%. NAB is forecasting the first cut in April 2024 while ANZ doesn’t see interest rates falling until November 2024.

Views on where interest rates may eventually land vary from CBA’s forecast of 2.6% at the lowest end to ANZ’s 4.1% at the top end.

What can Australians do to protect themselves?

If you’re worried about falling off the mortgage cliff when your repayments increase, you’re not alone. The RBA estimates that about 25% of borrowers coming off a fixed rate loan and onto a variable one during 2023/24 will be spending over 30% of their income on their home loan, which is a key measure of financial stress.

But there are things you can do to improve your situation and the first is to plan well ahead.

Contact your bank

Contacting your bank several months in advance of your fixed rate loan ending to find out what variable interest rate your loan will revert to when it rolls off and how this will change your repayments will give you time to prepare. Incorporate this into your budget to work out if your new repayments will be affordable, and if not, see if you can negotiate a better deal with your bank.

Your bank may be able to move you onto an interest-only loan for a short period of time, while some banks are also looking at extending the terms of their variable home loans to help lower repayments in the short-term – but be aware that this may result in you paying more interest over the life of the loan.

Contact your broker

The ‘revert rates’ that fixed loans roll off onto are usually not very competitive, so you could also use a mortgage broker to help you refinance your loan with another lender offering a better deal. Even if you don’t have the best credit history, there are options available to you. But keep in mind that breaking your loan and setting up a new one will likely come with transaction costs.

Use some savings

If you have savings, this money could help to act as a buffer for when your mortgage payments increase. In order to boost your savings, take a look at your budget and ways you can cut your discretionary spending.

If the situation means you may have to consider selling your property, consider contacting your bank’s hardship team before making any decisions. But if you ultimately decide that’s the best decision, it’s better to be proactive and sell on your own terms rather than being forced into a sale by your lender.

Tips for dealing with financial uncertainty during difficult times

If you’re experiencing financial stress, it’d be helpful to have a clear picture of your finances to understand if your stress is warranted. Having a budget that lists all of your incomings and outgoings can be the best way to see this.

Once you have a budget in place you may consider options for earning extra income, such as starting a side hustle, renting out part of your home to a boarder or taking on extra shifts or a second job. You can also take a close look at your expenses and ways to cut back on what you spend.

To ease the burden of financial uncertainty, it may also help to take a conservative approach to any financial decisions and have an emergency fund in place.

For help with managing financial stress and uncertainty, or if you’d like help engineering a soft landing off the mortgage cliff, contact the team at MyBudget on 1300 300 922 to discuss your situation and learn more about our services or enquire online.