The 2023 Mortgage Cliff in Australia

fixed rates to expire

2022 was a tough year for mortgage holders, particularly those on variable rates. The Reserve Bank of Australia increased the cash rate for a record eight months in a row. This means every month variable mortgage holders around Australia are paying more and more money, as the banks increase their interest rates in line with the cash rate.

The official cash rate is now 3.1%. It’s a far cry from the record low of .1% that we saw in November 2020. Back then, the government had slashed the rate as a way of easing the financial pain that the Covid pandemic with its multiple lockdowns was wreaking on the country. Therein lies the beginning of the sticky situation we are finding ourselves in this year…

Fixed Interest Rates Set to Expire This Year

When the interest rates were at their lowest, the pandemic was in full swing and Australians from around the world were returning home. Many of them wanted to settle and buy property. Increased demand saw house prices go up, and people were securing their new properties at very low interest rates.

A lot of the mortgages being taken were on fixed rates, which were as low as 1.9% per annum. In July 2021 the portion of mortgages that were fixed peaked at 46%, up from the usual of 20% . That’s a lot of mortgages fixed at a nice low rate… but most of them are due to expire in 2023.

How many? According to the Reserve Bank, 60% of fixed rate mortgages will be expiring. That equates to a whopping $370-billion worth of mortgages. But how does that translate into everyday terms for borrowers?

How Much Will Rates Rise?

When the fixed rate expires, borrowers are predicted to see their rates rise by between 3 and 4%. According to this article:

  • A borrower with a $600,000 mortage paying 1.95% will see monthly repayments go up by $1284.
  • A borrower with a $1-million mortgage will see their repayments go up by $2139.

This means mortgage holders will have a lot less ‘free money’ at the end of every month. In fact, the RBA is predicting 15% of borrowers will have negative free cash, while a third of borrowers will see free cash shrink between 60-100%.

One effect of this decrease in spending power is a slowdown in the sky rocketing inflation rate, which sat at 7.3% at the end of November. When inflation begins to drop, we should hopefully begin to get mortgage relief when lower cash rates come into play. It seems we have a way to go before we get to that stage though.

How Can You Manage the Interest Rate Increase?

If you’re on a variable rate you’re probably accustomed to the interest rate rises and have worked them into your budget. However, there are still 700,000 Australians due to experience rental shock in 2023.

We’d advise you to prepare yourself for the end of your fixed rate. Get your finances in order, decide if you can afford the increases. Perhaps it’s better to sell now than before the rates expire? If that is too drastic a move, then assess your current budgets and cut out unnecessary expenses where you can.

Speak to your lender too, particularly if you are having a hard time meeting repayments. Talk to a professional financial advisor. Do your own research on the other deals out there and see if you really are on the best option. It pays to inform yourself as much as possible.

Any Questions about Real Estate?

If you have any questions about buying or selling real estate, please get in touch with The Henry Wong Team®. We’ve been operating on the southside of Brisbane for many years now, and Henry is here to help guide you through your property transactions.