‘Fixed-rate cliff’ to be felt in April

Oksana Patron

27 February 2023

Although there is no escaping from a painful adjustment for Australians with fixed-rate loans, it will take longer for an impact of ‘fixed-rate cliff’ to be felt, with 35% outstanding fixed mortgage debt expected to expire in 2023, according to the analysis by CoreLogic’ head of research, Eliza Owen.

One of the reasons why the true impact of a cliff would be felt at a later date is the fact that the September quarter data on ‘non-performing’ loans, which is produced by the Australian Prudential Regulation Authority (APRA), captured only around two-thirds of interest rate increases seen to date.

According to data, during the reported period only 1% of home loans were at least 30 days past due and had been falling but non-performing loans themselves were generally considered repayments that had not been made for 90 days or more.

“Understanding the impact of rising rates on some households is difficult, because different income cohorts and support networks will vary in their response to higher interest costs,” Owen said.

“For example, some people may be able to move in with parents and rent out their home to supplement mortgage payments. People on higher incomes can also generally expend a higher portion of their income on housing.”

At the same time, institutions were working to avoid mass loan defaults in the housing market, with banks implementing options such as forbearance measures and ‘mortgage repayment holidays’ at the onset of the pandemic.

“For example, distressed borrowers may have the option to extend their loan term, thereby reducing their monthly repayments, or temporarily revert to interest-only repayments,” the analysis said.

“Notably, the ‘mortgage repayment holiday’ period also saw the rise of a ‘cliff’ narrative. In the end, the deadline for resumption of payments was extended by banks. There did not appear to be any material impact on the property market by the time those deferrals expired, though the economic and housing value context was starkly different then, to what it is now.”

According to CoreLogic, the painful adjustment for those with fixed-rate loans was partly the intention of rising rates, as households had to curb spending in response to higher interest costs.

“So far, listings data and arrears data suggest there is minimal impact on the housing market from defaults. However, the true test of the market will be over the next ten months.”

The data showed that banks financed around 1.2 million new home loans between January 2020 and October 2021 based on the Australian Bureau of Statistics (ABS) data, when fixed rates were falling and stayed low.

Fixed term home lending has historically comprised around 15% of new home loans, however as fixed interest rates plunged to record lows, fixed term home lending surged to 46% of new mortgage commitments in July and August of 2021.

According to the Reserve Bank of Australia (RBA) Financial Stability Review, around two thirds of the 35% outstanding fixed mortgage debt would expire in 2023 and around 23% of all outstanding mortgage debt will be re-priced over the course of the year, and re-priced at a much higher rate.

CoreLogic said that when fixed terms come to an end, borrowers would need to refinance their loan and the pain would be felt most acutely in April.

“Factoring in another 50 basis points of rate hikes over March and April, average variable rates could be around 5.7% for owner-occupiers and over 6.0% for investors.”