Australian Bond Exchange

Over 850,000 Aussies on fixed rate mortgages around 2%
will soon be facing variable rates of around 6%.  

View of cliff at Sydney bondi with property

To understand the fixed-rate mortgage cliff in Australia in 2023, there are two key concepts you need to understand.  

The first is how COVID-19 fostered the lending of “free money” and encouraged borrowers to lock-in fixed-rate loan commitments with very low interest rates.  

The second is how most of the mortgages that locked in these low rates during the pandemic are about to end, and switch to much higher variable rates, costing some Aussies $15,000 more per year than originally agreed. 

looking up at buildings in the city

COVID-19: The era of “free money” lending 

The COVID-19 pandemic brought with it an unusual era of “free money”, as the Reserve Bank of Australia (RBA) dropped the cash rate to just 0.1%. A target cash rate of 0.1% is “free money” as the interest charged to the debtor in return for lending them the money is very close to zero.  

The RBA cash rate is the ‘target rate of interest’ that the Australian economy uses to determine the “cost” of borrowing money. Just as fixed income investors charge a ‘coupon rate’ of interest for lending companies and government money via bonds, banks and other lenders charge a rate of interest based on the RBA cash rate. 

Financial institutions, banks and other lenders use the RBA cash rate as the key factor in determining the rates of interest on debt. This is used across a whole range of personal finance products including savings accounts, term deposits, personal loans, credit cards and home loans. 

When the cash rate dropped to 0.1% during the COVID pandemic, interest rates earned on mortgages, savings accounts and other personal financial products plummeted in response. Savings accounts offered close to zero interest and home loans became extremely attractive, with some mortgages boasting rates of interest of just 2%. 

Further, the RBA’s Term Funding Facility (TFF) provided this low-cost funding to banks and other financial institutions as a part of the response to the pandemic. To support the lower interest rates passed onto consumers, the RBA essentially provided banks with their own ‘fixed-rate’ loans for three years at a rate of just 0.1%.  As the TFF is due to expire in mid 2024, both mortgage holders and the banks will need to find new forms of funding to avoid the fall. 

Aussies feel the pinch, as “free money” expires 

This era of “free money” with 2% home loan rates and the bank borrowing for just 0.1%, saw a significant shift toward fixed-rate credit.  

However, in just one year the cash rate has increased by 400 basis points, with the most recent RBA increase taking the cash rate to 4.1%. 

That’s 41 times higher than the cash rate many fixed-rate mortgages were based on. 

The RBA calculates that $350 billion in fixed-rate mortgages will expire in 2023, and switch over to variable rates which, according to the Australian Financial Review and Mortgage Choice, could cost Aussies $1620 more in payments per month, if they have a mortgage of $1,000,000. 

The Mortgage Cliff 

Over 850,000 Aussie debtors with fixed rate mortgages boasting interest rates of around 2% will soon be facing variable rates of around 6%.  

What’s more, RBA data shows only one third of fully fixed owner-occupier debtors will be able to afford the minimum scheduled payment for three months or more, if they were to immediately roll off to the average new variable rate.   

This is where the mortgage cliff emerges. 

Aptly named a cliff – as debtors try to afford potentially the doubling or tripling of repayments amidst high inflation- there is a fear that many mortgage holders will struggle to pay and fall into hardship. 

Property investment no longer the “silver spoon” 

In the recent release of the minutes from the RBA’s June meeting, it was clear that this mortgage cliff could see mortgage payments increase to 10% of household income by the end of 2024.  

“Scheduled mortgage payments had increased further and equated to around 9 per cent of household disposable income in April [2023]” members said, “and to the equivalent of around 10 per cent of household disposable income by the end of 2024.” 

According to AMP Capital Chief Economist Shane Oliver, relying on property as the silver spoon that will consistently generate high returns is no longer a short-term option.   

“You’re not going to become super wealthy through housing,” he said. “You won’t make that transformational wealth that people have made over the last 30 to 40 years.”  

Fixed income can be an attractive alternative investment strategy, if you’re looking to de-risk from the property and share markets, in fact Larry Fink from BlackRock and Wall Street Veteran Bob Michele have done just that.  

If you’d like to learn more about bonds and fixed income investments, click here to speak to an investment adviser. 

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