What Is the Mortgage Cliff?

The mortgage cliff: it’s a term that you’ve likely seen circulating in the media and by economists across Australia. But what does it actually mean, and what are the implications for Australian homeowners?

The mortgage cliff is a term coined in response to the Reserve Bank of Australia's (RBA) series of successive interest rate hikes. In essence, it refers to a period when a significant number of fixed-rate mortgages are set to expire simultaneously. A lot of Australians fixed their mortgages a few years ago when rates were extremely low. This was in response to the COVID pandemic, where we saw the RBA dropping the cash rate to a historic low of 0.10%. As a result, many Australians took advantage of the low cash rate, securing fixed-rate loans and entering the housing market.

Fast-forward to 2023, and the estimated 880,000 fixed loans that were secured during the period of low interest rates are on the brink of switching to significantly higher variable rates. The RBA reports that about half of all fixed-rate credit mortgages are set to expire this year, creating what has been termed the ‘mortgage cliff’.

The most intense impact is anticipated between now and September, when one-third of fixed-term credit will expire, forcing households to grapple with a 350 basis point increase in the cash rate from the previous year. This scenario raises significant concerns for those coming off fixed mortgages, especially considering the numerous interest rate rises over the past 8 months.

Many homeowners who obtained mortgages a few years ago will find that if they re-applied today, they would not be able to borrow at the same levels. Enter the term ‘mortgage prison’, which essentially describes the scenario where many of these homeowners may not be able to borrow the same amount again. The term refers to the predicament where homeowners, unable to secure a comparable loan from another lender, are 'imprisoned' with their current lender. This means they don’t have the ability to shop around, negotiate new terms, or refinance, limiting their options significantly, as they normally would - they’re essentially stuck with their current lender.

As a result, a considerable number of people will transition from a low fixed-rate loan to much higher variable. Some homeowners might see their monthly repayments increase by over $2500, creating the steep rise termed as a mortgage cliff. There are valid concerns that this could result in widespread mortgage stress. While some borrowers may default on their home loans, it's expected that most will adjust their budgets and reduce other spending to afford their repayments.

If your mortgage rate is set to expire this year, it's advisable to get ahead of the curve. Reach out to your finance broker and start considering your options. They’ll be able to guide you through the process and weigh up your best options.

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