The 700,000 Australians whose fixed-rate mortgages expire in 2023 face a serious financial shock.
When these homeowners are compelled to switch to a considerably higher variable rate, their monthly payments will likely increase by more than 40 percent.
Kate Forbes, national head of property strategy at Metropole, refers to 2023 as the “refinancing cliff” year.
She stated, “Borrowers who obtained fixed-rate loans during the pandemic will certainly face considerably higher mortgage rates when their fixed terms expire.”
In May of 2021, when the Reserve Bank cash rate was still at a record-low of 0.1 percent, Australia’s banks offered average fixed-rate mortgages with a rate of 1.95 percent.
700,000 Australian homeowners whose fixed-rate mortgages expire in 2023 face a serious financial shock
However, eight Reserve Bank rate hikes since May have pushed consumers into variable mortgage rates, which currently average 5.01 percent among the largest banks, according to RateCity calculations.
A borrower with an average mortgage of $600,000, now at an ultra-low fixed rate of less than 2%, would see their monthly payments increase by 46.3% to $3,225, from $2,203.
This is based on the extremely optimistic assumption that the Reserve Bank of Australia will not hike rates any more, a situation that is not anticipated by any major bank.
In Sydney, where the typical property price according to CoreLogic is $1,243,126, a working couple with a 20% down payment and a mortgage of nearly $1 million would see their monthly payments increase by $1,693 to $5,345 from $3,652.
This is also based on the Reserve Bank’s current 10-year high cash rate of 3.1% and the 32-year high inflation rate.
To make matters worse, the RBA is anticipated to raise interest rates once more in 2023, following eight rate hikes in 2022 – the most rapid pace of monetary policy tightening since it first issued a target cash rate in January 1990.
ANZ and Westpac anticipate additional rate hikes in February, March, and May, bringing the cash rate to an 11-year high of 3.85%.
Aussie Home Loans predicted that the average new variable rate could rise to 5.71 percent if this forecast materializes.
When homeowners on a 2% fixed rate are forced to switch to a considerably higher variable rate of more than 5%, it is anticipated that their monthly payments will increase by a minimum of 40%
Borrowers with fixed rates face increased rates.
The Reserve Bank of Australia expects that 60% of fixed interest rates will expire in 2023.
In May of 2021, average fixed interest rates were only 1.95 percent, but when they expired the following year, borrowers would be subject to variable rates of at least 5 percent.
A borrower with a typical $600,000 mortgage would see his or her monthly payments increase by 46 percent, from $2,203 to $3,225.
The RBA is predicted to raise rates three additional times in 2023.
Aussie Home Loans forecasts that this will result in average variable interest rates of 5.71 percent.
The borrower with a $600,000 mortgage would see a 58 percent increase in monthly payments to $3,487.
A borrower with a $600,000 mortgage who is currently paying a fixed rate of 1.95 percent would see their monthly payments increase by 58 percent, or $1,284, to $3,487 from $2,203.
The monthly payments for a borrower with a $1 million mortgage would increase by $2,139, from $3,672 to $5,811.
According to the RBA’s Financial Stability Review, 60% of fixed-rate mortgages will expire by the end of 2023.
When a result, the interest rates for these borrowers would increase by at least three percentage points as they became variable-rate borrowers.
According to the 2021 Census, 3,3 million Australians have a mortgage.
35% of borrowers, or 1.155 million, held a fixed mortgage, according to RBA data.
In 2023, over two-thirds, or sixty percent, of these fixed-rate borrowers will see their ultra-low rates expire.
That would subject 693,000 debtors to a substantial rise in their monthly payments.
According to the Reserve Bank’s own Financial Stability Review, a 3.5 percentage point increase in mortgage rates by the end of 2023 would result in a minimum payment increase of at least 40 percent for over 60 percent of borrowers with fixed-rate loans.
‘Based on current market pricing for the cash rate and assuming full pass-through to variable mortgage rates, most fixed-rate borrowers with loans expiring in 2023 will face discrete increases of three to four percentage points in their interest rates when they roll over to variable rates, depending on their current rate and the timing of their fixed loan term expiration.’
In the year leading up to September, inflation soared by 7.3%, the largest annual increase since 1990 and already well above the Reserve Bank’s 2 to 3% target range.
By the end of 2022, the RBA expects the consumer price index, another name for headline inflation, to reach a fresh 32-year high of 8%.