Fixed-Rate Cliff: Potential Risk to Australian Property Market in 2023

The Australian property market has seen a surge in fixed-term home lending due to record low interest rates during the pandemic. However, a significant risk, known as the ‘fixed-rate cliff,’ is causing concern in the market.

This is the expiry of fixed-rate loans, which surged during the pandemic, and are set to increase to variable rates from April 2023.

As more fixed loans revert to variable rates, there is likely to be some challenge to serviceability. Interest rates have risen beyond 3 percentage points for many borrowers, which is the minimum serviceability buffer recommended by APRA in assessing whether someone can repay their debt.

The looming fixed-rate cliff is one of the biggest potential risks to the Australian property market in 2023.

In this article, we will explore what the fixed-rate cliff means for homeowners and the property market. We will also offer strategies to mitigate the risk of the fixed-rate cliff.

TL;DR:

• The fixed-rate cliff is the expiry of fixed-rate loans, which surged during the pandemic, and are set to increase to variable rates from April 2023.
• The repricing from an average two-year fixed term rate during the pandemic to a variable rate two years later will be most noticeable from April 2023.
• Stretched serviceability could be compounded by an increase in the unemployment rate this year, along with higher than budgeted household costs due to high inflation.
• Homeowners facing the end of a fixed-term rate need to be aware of the potential rate hikes that will follow. Homeowners may wish to consider refinancing, switching to a fixed rate, or making additional payments to offset their loans.

The Risk of the Fixed-Rate Cliff

As covered by CoreLogic, the fixed-rate cliff is a looming risk to the Australian property market.

Fixed-term home lending surged to 46.0% of new mortgage commitments in July and August of 2021.

The Reserve Bank of Australia noted that around two-thirds of the 35% outstanding fixed mortgage debt would expire in 2023. From April 2023, around 23% of all outstanding mortgage debt will be re-priced at a much higher rate.

Borrowers will need to refinance their loan, and with expected rate hikes over March and April, variable rates could be around 5.7% for owner-occupiers and over 6.0% for investors.

The pain will be felt most acutely from April 2023. As more fixed loans revert to variable rates, there is likely to be some challenge to serviceability. Interest rates have risen beyond 3 percentage points for many borrowers, which is the minimum serviceability buffer recommended by APRA in assessing whether someone can repay their debt.

What Are the Risks?

Stretched serviceability could be compounded by an increase in the unemployment rate this year, along with higher than budgeted household costs due to high inflation. A rise in distressed sales could also put added downward pressure on property values. If people are forced to sell their home in a declining market, there is the added risk of being unable to recover mortgage debt from the sale of a home.

What Can Homeowners Do?

Homeowners facing the end of a fixed-term rate need to be aware of the potential rate hikes that will follow. It is important to consider the options available to mitigate the risk of the fixed-rate cliff.

One option is to refinance, which involves switching to a new lender and a new loan with a lower interest rate. Homeowners can also consider switching to a fixed-rate loan, which will protect them from potential interest rate hikes.

Another option is to make additional payments to offset their loans. This involves making extra payments on their mortgage, which can reduce the principal and shorten the loan term. This strategy can help homeowners pay off their mortgage faster and save on interest costs.

In summary, the fixed-rate cliff is a significant risk to the Australian property market, and homeowners need to be aware of the potential rate hikes that will follow.

The risk of serviceability challenges is heightened, given the current economic conditions, including high inflation and rising unemployment rates.

Homeowners should consider refinancing, switching to a fixed rate, or making additional payments to offset their loans to mitigate the risks. It is crucial for borrowers to speak to their lender or a financial advisor to determine the best strategy for their individual circumstances.

Sources: CoreLogic, SMH.com.au

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