The threat of Australia’s fixed-rate cliff is proving to be a scary and very challenging reality for an increasing amount of homeowners.
As we reach the middle of 2023, the grim prediction that tens of thousands of Australians would see their mortgage payments more than double overnight has crystallised.
Even more concerning is that many of these homeowners have found themselves effectively becoming prisoners to their own mortgage.
That is because the Reserve Bank of Australia’s 12th interest rate hike in June pushed many borrowers beyond the point where they fail the ‘serviceability challenge’.
This means banks will no longer allow them to renegotiate their loans, leaving them to meet the variable rate or sell their homes.
But there is an ace in the pack you can play.
First, let’s take a closer look at what’s happening and why.
What has caused the cliff?
The fixed-rate cliff has been caused by the enormous amount of fixed-rate loans taken out in 2020 and 2021 when interest rates were at a record low.
The RBA cut the official cash rate to 0.1% in November 2020 and Australians borrowed billions of dollars to buy their dream homes.
Most of those loans were fixed at around 2% but the most competitive variable rates are now as high as 5.69%.
For a $600,000 loan over 30 years, that would lift a family’s weekly repayments from $511 to $802.
That’s an extra $15,132 per annum!
How many people are affected?
According to the RBA, 800,000 loans worth around $350 billion expire this year.
They account for one third of outstanding housing credit in Australia.
Most of those loans expire between June and September.
Those who failed to heed the advice to refinance before their fixed loans expired could find themselves trapped in a ‘mortgage prison’, facing a huge hike in their repayments while being unable to refinance.
Why can’t they refinance?
Many homeowners are prevented from refinancing because they fail the ‘serviceability challenge’.
In order to qualify for the right to refinance their loan, borrowers must be able to prove they can service that loan.
To do that, they must show they can afford the variable loan rate plus the serviceability buffer which currently stands at 3%.
When many of those borrowers took out their fixed loans in 2020, that serviceability buffer was only 2.5%.
The buffer is set by the Australian Prudential Regulation Authority (APRA) which is charged with overseeing banking stability in Australia including ensuring loans remain viable for both banks and their customers.
It attempts to allow for changes to market rates as well as the circumstances of borrowers to ensure the loan can be serviced.
In June, the Commonwealth Bank’s standard variable rate stood at 8.55%.
Hence to refinance, borrowers now need to prove they can afford a loan as high as 11.55%.
On that $600,000 loan, that means proving you can afford weekly repayments of $1491, a figure that goes beyond the reach of many, many Australians.
What’s the solution?
If you are one of the thousands of Australians pushed over the fixed-rate cliff, the best rein you can pull is to contact an experienced mortgage broker as soon as possible.
The reality is that the serviceability buffer remains a guide and banks do have some room to move.
In particular, lenders will look more favourably upon borrowers who have demonstrated a solid repayment history and can prove they can continue to make repayments.
Mortgage brokers have spent their careers building great relationships with not just banks but a range of other lending institutions.
They have the negotiating skills and power to help secure their clients the best deals, whatever their circumstances.
Get advice today
Calder Finance Broking are specialists in the mortgage broking business in South Australia.
We can help you refinance and regularly achieve better rates for our clients by as much as a full percentage point.
On a $600,000 loan, that could represent savings of hundreds of dollars a month.
At Calder, we can advise you on the most prudent property finance strategies for your circumstances and ensure you are taking advantage of the very best loan deal on the market.
We pride ourselves on leading our clients into the future with structure, financial stability and confidence.
Contact us today to discuss all of your financial needs and concerns.
The information contained on this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
Taxation, legal and other matters referred to on this website are of a general nature only and are based on Calder Wealth Management’s interpretation of laws existing at the time and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time.
Calder specialises in wealth management with a focus on advice, investment, sustainability, insurance and finance.
Written by David Titley from Calder Finance Broking, for more information please visit the Calder Finance website. Please note that Calder Finance Broking Pty Ltd is a Corporate Credit Representative of BLSSA Pty Ltd ABN 69 117 651 760 ACL 391237.