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The Fixed Rate Mortgage Cliff: How To Prepare For The Fall

The coming mortgage cliff is a significant issue for many Australians who are currently financing their home through a fixed-rate loan they undertook as a result of unusually low-interest rates during the pandemic.


In late 2020, while governments grappled with different strategies to keep citizens safe, first-time buyers enjoyed record-low rates of around 2.43%. Coupled with relatively low inflation, as economies worldwide slowed, many Australians used this as an opportunity to break into the property market.


Now it’s two years later and the fixed term period on those home loans is expiring or approaching the end of the term, making month repayments unaffordable for many. You may remember the United States faced a similar problem in 2008 when hordes of so-called subprimes suddenly threw the US economy into near shambles. 


Is Australia facing a similar meltdown? It has been reported that many Australians are now facing monthly payments almost triple what they currently pay which is cause for a lot of uncertainty for countless Australians across the country. 


Continue reading below to learn more about the fixed rate mortgage cliff, what it is and review your options moving forward.


How Big Is The Cliff?


According to The Australian, one recent study estimates that about 45% of the homebuyers’ market during COVID took advantage of low fixed-term home loan rates. That breaks down to roughly two out of five borrowers expecting their monthly out-of-pocket expenses to increase suddenly in the near future.  Here’s an example to give you clearer idea:


Let’s say you purchased a property for $600,000 with a 10% deposit and a $540,000 loan. Data from the Reserve Bank of Australia shows the average interest rate paid on new fixed-rate loans with a term of three years or less was 2.19% in November 2021, making repayments of approximately $2,000 a month. If you refinance your mortgage, the average 2-year fixed term rate sits at 5.82%, making your new repayment approximately $2,900. 


Which Areas Will Feel The Pinch?


The primary areas where these loans were common include: Suburban areas of Melbourne and Sydney, and a third were from New South Wales. Also, outer suburb areas like Broadmeadows, Wyndham, Loganlea, and Oxenford, to name a few, had a high prevalence of these low-rate fixed-term loans, according to recent analyses.


What Rates Will Borrowers Now Face?


As of February 11th, the official cash rate stands at 3.35%, per the Reserve Bank of Australia’s February board meeting. That follows a series of consecutive hikes throughout the latter part of 2022. While it’s unclear if more hikes are to follow, you can bet we won’t see any declines in the cash rate anytime soon as the world economy still faces severe headwinds in several metrics.


Many experts expect the peak rate to be around 3.6 to 3.85% by March 2023, most likely settling around 3.10% come March 2024, according to NAB. In terms of inflation, economists hope to see a reduction next year as the contributing factor of supply-side challenges hopefully gets resolved in many countries, including Australia.


Consumer demand is still outpacing supplies due to many economies effectively being shut down due to COVID. So where does that leave fixed-rate borrowers in the meantime? If you don’t already have a financial planner in your corner, it’s time to visit bestfinancialplanners.com.au to connect with a financial planner in your area.  Speaking to an experienced professional, whether it be a financial advisor or mortgage expert at your bank can help you outline the different options available to you and put a plan in place to manage repayments. 


Once you consult with a qualified professional who is also local to your market, you’ll have a clear picture of the many options available to you, as they’ll have a broad understanding of the current forecasts for your particular area. To get the most value from this consultation, be sure to review the action items and options below further to prepare for the meetings with your financial consultant.


Review Your Loan Terms


Review all of the pertinent documents from your loan to reacquaint yourself with the main points, including the term’s end and the subsequent new rate you’re facing. Then do some initial calculations to determine how much your payments are likely to increase.


Assess Your Financial Situation


Look at your broader financial picture, including your current income and expenses, and estimate how much more you can pay monthly toward the mortgage. Prepare yourself for budgetary changes, such as cutting back on discretionary spending and selling off some assets to account for the coming higher loan payments.


Assess The Longer Term


It’s important to consider how higher mortgage payments will affect you and your family long term.  Do you have other long-term debts you expect to incur, such as college for the kids, saving for a new vehicle or paying back a recent family holiday? Make a list of these items and bring them to the consultation with your financial planner so they can be factored into the new equation.


Refinancing Your Loan


You might decide that refinancing with a different lender is a workable option. However, don’t forget to consider the fees associated with this option, including lawyer costs, application fees, and stamp duty.


Selling The Property


Depending on your specific situation, it may be the best option for your family due to the sudden increase in loan rates. Take a hard look at your current real estate market and the present value of your home. Nobody likes the idea of losing their home, but if handled correctly, you may be surprised that this option can work out in your favour.


Make Informed Financial Decisions Moving Forward


This is a very difficult time for many Australians across the country. Everyone’s situation will be unique, impacting some homeowners much worse than others. However, it’s important to remember that while there are major decisions to be made, you do not have to face them alone. By reviewing all of the items above, before seeking professional advice and planning, you’ll be ahead of the game when the end of your current loan’s term arrives.