The fixed rate mortgage cliff is crushing

Lending data shows that $158 billion in fixed rate mortgages will mature before the end of this year.

The uniqueness of Australia’s experience with ultra-low interest rates and fixed-rate mortgages has produced an almighty headache for some homebuyers.

A staggering $158 billion in fixed rate mortgages will fall due before the end of the year, according to research by Finder.com.au, leaving the unwary with extraordinary headaches.

Traditionally, most Australian home loans were variable rate loans, but rock-bottom interest rates and the Reserve Bank’s policy of shoveling free money to the big banks and demanding that they lending again produced a massive increase in the number of short-term fixed rate loans. mortgage rates, some of which were taken out at interest rates below 2%.

This was not seen as a problem by borrowers – many of whom relied on Reserve Bank assurances that they expected no interest rate hikes until 2024 as they took out loans on terms of one to five years.

Nearly half of the loans taken out were fixed rate

Finder figures showed that a staggering 46% of home loans taken out in July and August last year were fixed rate, showing just how widespread the problem could be.

Now thousands of borrowers with these loans have realized to their horror that when they mature before Christmas, their average monthly repayment amount will increase by $641, which is a big change for anyone, let alone a buyer. of relatively new house.

It is almost certain that the size of the interest rate cliff will not be supported by a large amount of savings since most new borrowers are strapped for custody, which makes this type of repayment a problem. seriousness that could push many of them into mortgage stress.

A quarter of borrowers already in difficulty

Finder’s Consumer Sentiment Tracker found that one in four Australians struggle to pay their mortgage each month.

Even that number is likely to be underestimated after five consecutive months of official interest rate hikes by the Reserve Bank that pushed the cash rate up from 0.1% to 2.35%, with other increases almost certain.

This is the highest official rate since December 2014, when it was 2.50%.

These increases over just five months mean that those with a $500,000 loan will face an increase of over $600 per month and those with a $1 million loan will see increases of over $1,200 per month. month.

Rising refunds aren’t the only problem

The repayments that increase so rapidly when loans move from fixed to floating are not the only problem for those who face the cliff of fixed mortgages.

Falling property values ​​in parts of Australia could make it difficult for some borrowers to refinance, or at least without incurring additional taxes such as lenders’ mortgage insurance, which is mandatory for loans without a mortgage component. equity of 20% or more.

All of this is on top of a very busy time in the offices of many mortgage brokers and – unfortunately – in direct negotiations with banks by borrowers who have reached real levels of financial hardship.

The only silver lining to this situation is Australia’s strong job market, which will hopefully entice those looking for a scramble to make their monthly repayments.

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