Mortgage cliff looms large for borrowers – Image: Unsplash
  • Fixed-rate borrowers face unprecedented financial hit
  • Looming mortgage cliff could increase repayments by 63%
  • Refinancing and seeking lowest rates may ease repayment pressure

Fixed-rate borrowers will be hoping for no more rate hikes when the RBA meets today, with new data showing that the looming mortgage cliff could see repayments surge by 63%.

According to Canstar, borrowers whose two-year fixed rate loans were taken out in 2021 at an interest rate of 2.21%, could see repayments on a $500,00 loan rise by $1,200 or 63% to reach $3,101 per month based on the recent average variable rate of 6.57%.

It’s a similar scenario for borrowers who opted for a three-year fixed rate in 2020 and were locked into an average rate of 2.61%. These borrowers will soon face an estimated 53% increase in their repayments, taking the monthly commitment on a $500,000 loan from $2,004 to $3,074.

Many experts are predicting there is a 50% chance the Reserve Bank of Australia (RBA) will hike rates at its next meeting today, which could see the official cash rate (OCR) hit 4.35%.

Canstar’s finance expert, Steve Mickenbecker said fixed rate borrowers of two or three years ago are facing an “unprecedented hit to their finances” with their interest rate possibly trebling overnight when the mortgage cliff hits.

“Fixed-rate borrowers have not had the past year to acclimatise to higher interest rates. They have avoided the pain of adjusting their budget for higher loan repayments but will be on the receiving end of the Reserve Bank’s 12 cash increases over the past year all in one huge hit,” said Mickenbecker.

“The position of borrowers will deteriorate even further if the Reserve Bank continues to lift the cash rate over coming months, as expected by a couple of the major banks.”

Inflation remains sticky

The latest monthly consumer price indicator shows inflation fell sharply to 5.6% over the 12 months to May, down from 6.8% in April.

Mickenbecker said that the latest inflation numbers are encouraging and probably enough to for the RBA to keep the cash rate steady in July

“If the more robust quarterly inflation data released in July doesn’t confirm the trend towards the Reserve Bank’s two to three per cent inflation target, we can expect further rate hikes.”

Steve Mickenbecker, Canstar’s finance expert

“The labour market is very tight with the lowest unemployment rate in decades, and this will feed wage pressure into the inflation rate. It doesn’t look as if the Reserve Bank’s job is done yet.”

Despite the odds of a rate hike remaining mixed, Mickenbecker said that borrowers need to do what they can to reduce the impact of higher loan repayments on the household budget.

He said fixed-rate borrowers should use the expiry of their loan as a trigger to find the lowest rate possible.

What could refinancing look like?

According to Canstar, the lowest variable rate currently available is 5.24% for borrowers with an 80% loan-to-property value ratio (LVR) or lower, which could save a typical borrower with a $500,000 mortgage $397 per month when compared to the current average variable rate of 6.57%.

Mickenbecker said to help cope with the inevitable higher repayments, any borrower with a fixed period still to run should be making the necessary adjustments now and be putting themselves ahead with extra repayments.

“It’s likely that the rate borrowers will move to at the end of a fixed term will exceed today’s average variable rate, as the interest rates that fixed rate loans automatically roll into are generally set by banks in their favour.

“There will almost inevitably be better deals available with your current lender or a competitor. Now is the time to market yourself around.

He said that refinancing into one of the lowest interest rate loans will ease the financial pressure on borrowers.

“It won’t save borrowers altogether from repayment pain, but it will provide hundreds of dollars that won’t have to be found elsewhere in the family budget.”

Avoiding mortgage prison

Mickenbecker said it’s important to look at refinancing earlier rather than later to avoid getting stuck in mortgage prison.

“The refinance avenue will have closed for many borrowers who will not be in the financial shape to appeal to a new lender.”

“It is imperative that they talk to their lender in advance of the fixed rate expiration to find out what their repayments will be and to discuss their options.

“Lenders may open the door to assist fixed rate mortgage cliff borrowers by extending their loan term or switching to interest-only repayments, but there needs to be a strong caution about getting back on track when times get better.”

Commonwealth Bank recently announced it could cut the interest rate stress test for some borrowers refinancing their mortgage – from 3% higher than market rates to 1 per cent – in a bid to help borrowers who were struggling to refinance.

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