Fixed rate mortgage reset to add more issues

Oksana Patron

3 November 2022

The extraordinarily high level of fixed-rate mortgage volumes that were written during the pandemic when interest rates dropped to a record low is now going to create significant problems for the Australian economy, according to specialist of marketplace for buyer’s agents, BuyersBuyers.

This will also have further implications for Australian household consumption as many borrowers would be trapped and left unable to refinance due to the increased lending assessment buffers in place since October 2021.

According to BuyersBuyers’ chief executive, Doron Peleg, the irony was that rules introduced to bolster financial stability could end up being a major source of financial instability if they were not taken back to the pre-pandemic settings.

On top of this, tightened lending conditions would exacerbate the challenge and create the situation in which fixed-rate mortgage cliff would loom large.

“If a mortgage rate resets from 2% to a rate or around 6%, for example, borrowers will naturally be minded to shop around for the best possible mortgage rate or product to cushion the blow,” he explained.

“Unfortunately under the present lending conditions, many do not have the choice of refinancing due to tighter lending rules.”

Therefore, household consumption would have a major impact on Australia’s economic growth, and policy settings would be a key determinant of outcomes from here.

At the same time, it remained unclear how much further the Reserve Bank of Australia (RBA) would take interest rates before pausing and taking into account the lagging effects of monetary tightening, leaving the trajectory of mortgage rates to be the single biggest driver of mortgage stress.

“There is some headroom for some of the worst hit borrowers to be cushioned by lenders offering interest-only loan terms, or even mortgage holidays in more extreme cases,” the firm’s co-founder, Pete Wargent said.

“A far better outcome, however, would be to allow the mortgage market to function more freely by restoring the lending conditions in place prior to October 2021, so that stressed borrowers can shop around for more attractive mortgage rates and terms.

“The alternative path looks decidedly messy.”