Fixed rate mortgage cliff is overwhelming

The peculiarity of Australia’s experiment with ultra-low interest rates and fixed rate mortgages has produced an almighty headache for some home buyers.

According to research by Finder.com.au, an incredible $158 billion of fixed rate mortgages will mature before the end of the year, leaving some extraordinary headaches for the unwary.

Traditionally, most Australian home loans have been variable rate loans but the ultra-low interest rates and the Reserve Bank policy to shovel free money towards the big banks and demand they lend it out again produced a massive rise in the number of shorter-term fixed rate mortgages, some of which were written below 2% interest rates.

That wasn’t seen as much of a problem by borrowers – many of whom were relying on assurances from the Reserve Bank that they were not planning any interest rate rises before 2024 as they grabbed loans on terms of one to five years.

Almost half of loans written were fixed rate

Finder figures showed that an amazing 46% of home loans written in July and August last year were fixed-rate, showing how widespread the problem could be.

Now thousands of borrowers with these loans have realised to their horror that when they mature before Christmas, their average monthly repayment amount will rise by $641, which is a serious chunk of change for anyone, let alone a fairly new home buyer.

The size of the interest rate cliff is almost certain not to be backed by a big fold of savings given that most new borrowers are hocked to the hilt, making that sort of repayment bump a serious problem that could push many of them into mortgage stress.

A quarter of borrowers already struggling

Finder’s Consumer Sentiment Tracker found one in four Australians struggle to pay their mortgage each month.

Even that number is likely to be an under-estimate after five straight months of official interest rate rises by the Reserve Bank took the cash rate from 0.1% to 2.35%, with more increases almost certain.

That is the highest official rate since December 2014, when it sat at 2.50%.

Those increases over just five months mean that those with a $500,000 loan will be facing an increase of more than $600 a month and those with a $1 million loan will see increases of more than $1,200 a month.

Increasing repayments not the only issue

Repayments that rise so rapidly when loans move from fixed to floating is not the only issue for those facing the fixed mortgage cliff.

Falling property values in some parts of Australia might make it difficult for some borrowers to refinance at all, or at least without incurring extra imposts such as lenders mortgage insurance, which is mandatory for loans without a 20% or greater equity component.

All of which adds up to a very busy time in the offices of many mortgage brokers and – sadly – in direct negotiations with banks by borrowers who have reached real levels of financial pain.

The one positive of this situation is Australia’s strong employment market, which will hopefully be conducing to those seeking a side hustle to make their monthly repayments.