Fallout From Fixed Rate - April 2023
April 24, 2023 / Written by Rich Harvey
By Saranga Sudarshan, Insights Analyst at Finder
In the years leading up to and during the COVID-19 pandemic Australian households enjoyed historically low home loan interest rates. Some homeowners were savvy enough to take advantage of this by taking out low fixed rate home loans. However, May 2022 was a turning point for the Australian property market. The Reserve Bank of Australia (RBA) increased the cash rate for the first time since November 2010 in response to rising inflation. 10 straight cash rate increases later, the expiry of low fixed rate home loans have formed an impending “fixed rate mortgage cliff”. This is the steep rise in mortgage repayments that homeowners are set to face in 2023 and 2024.
Finder’s research estimates that $128 billion worth of fixed rate home loans are set to expire by the end of 2023. These are mortgages originally taken out during 2020 when discounted standard variable rates dropped as low as 3.65%. Another $266 billion worth of loans are set to expire in 2024 (these are loans taken out in 2021). Of all outstanding fixed rate loans, RBA figures show 880,000 are set to mature into variable rate loans in 2023 and 450,000 in 2024.
So what does all this mean for the average homeowner who took out a fixed rate loan in the last 3.5 years? For loans expiring in 2023, Finder estimates the average household could
face an extra $743 in their monthly repayments. For those whose loans are set to expire in 2024, the rise is estimated to be even higher at around $884 per month.
These increases in monthly repayments will affect households differently depending on their income and levels of debt. For instance, as the RBA has shown, around 20% of those on fixed rate mortgages are expected to face significant pain with less than 3 months of liquid assets to meet their increased monthly repayments. These assets include cash in deposit accounts, shares or units in managed funds and offset balances.
Finder’s Consumer Sentiment Tracker shows a steady rise in the percentage of households with mortgages reporting their home loan repayments as their most stressful monthly bill. As of April 2023, this figure stood at 63% of households, which is up from a low of only 37% of households in April 2021. In addition more than a third of households with some form of mortgage report that they struggle to pay their home loan. This is up from a low of 17% in October 2021.
However, the effects of increased monthly repayments will be moderated across households for 2 main reasons.
1. Lower-income households tend to have lower levels of household debt. RBA figures show that households in the bottom 20% by income carry only 5% of the total share of household debt.
2. Households saved a significant amount during the pandemic which was funnelled towards excess repayments. For instance, Finder’s analysis of RBA data shows that excess repayments were as high as 37% of total Australian mortgage payments in 2020 and 2021.
As a result, households are likely to meet their increased mortgage repayments by cutting down on their excess payments or dipping into savings buffers. For instance, by the end of 2022 excess payments as a percentage of total Australian household mortgage funding was back down to 16%. In the current labour market, some households will also likely try to balance their budget by trying to increase their income through looking for more hours to work or a second job.
Regardless of fixed rate mortgages expiring, the world is in a new era of elevated interest rates. So far this has pushed home prices and sales activity down as the borrowing capacity of buyers has fallen. CoreLogic data shows that home prices have fallen 9% in Sydney and 7% in Melbourne in January 2023 from their peak in April 2022. Over the same time period sales activity dropped more than 50% in Sydney and Melbourne.
This new period of higher interest rates will involve a degree of adjustment as potential buyers find ways to offset the increased cost of home loans. This will likely involve spending more time renting as they save up for a bigger deposit, find a higher-paying job or pay off other debts.
Higher interest rates are on their own unlikely to cause any huge upswing in people being forced to sell. A recession with a significant rise in unemployment will be needed for that. However, one area of forced selling might come from highly indebted short-term investors who had banked on rising home prices and households that can no longer refinance. The RBA has indicated that roughly 15% of owner-occupier home loans are unable to refinance at present because they would fail a serviceability assessment. Some of these households could be forced to sell in the current depressed property market.
Is it a good time for buyers looking to get in at the bottom of the market? It is probably too early to tell if we are at the bottom of the property market. The combined effects of higher interest rates on households budgets are yet to be felt in full. However, there are some indications that property prices are stabilising. The CoreLogic home price index shows a small increase in home prices in Sydney, Melbourne, Brisbane and Perth in March compared to February. In addition, medium- to long-term housing supply continues to look bleak. ABS data shows that building approvals fell 31% year-on-year to 10-year lows in February. This is likely due to the increased cost of construction and developers holding back supply to put upward pressure on prices.
Overall, the effect of the fixed rate mortgage cliff on households will depend on how quickly inflation can be brought down and the general health of the Australian economy. The quicker inflation comes down to between 4% and 5%, the more likely that interest rates will stay flat or even perhaps decrease. This would soften the increase in monthly payments for households switching over to variable rates over the next 2 years. If the overall economy stays healthy and avoids a recession, households could largely absorb an increase in monthly payments. If the economy goes into recession or contracts sharply a rise in unemployment would mean households having to make some tough decisions. One hopes though that the RBA and the current Labor government see the opportunity of tight labour markets for boosting economic growth and reducing poverty.
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