Today, the average fixed-rate mortgage borrower faces an increase of 3.46 percent in their rate.
Some of the cheapest loans on offer resulted in a 3.9% increase for those who took advantage of them.
In spite of current rates, borrowers with fixed-rate mortgages will face higher mortgage rates than the buffer rates applied by APRA.
Challenges to come
The RBA estimates that more than 50% of households with a fixed-rate mortgage expiring in 2023 will face a 40 percent or greater increase in mortgage payments.
This demographic has 11 percent of households that will have their repayments increase by more than 60%.
It is difficult to determine exactly how this will impact this particular demographic of households.
Those who took out mortgages at over six times their household income face the possibility of paying more than 40 percent of their gross income on their home loans, whereas those with smaller mortgages that originated years ago refinanced to a fixed rate loan at a lower price.
A significant minority of people face high risks
A recent analysis from the Reserve Bank of Australia shows that 14.6 per cent of mortgage holders would have negative cashflow at 3.6 per cent (two 0.25 per cent increases to the current rate).
Additionally, 8.1% will see their household budgets shrink by 60-100 percent due to a reduction in spare cash.
In contrast, 6.5% of borrowers would not be affected by a 3.6% rate, while 41.1 % would see their household spare cash drop by 0.20 %.
The chart shows that the majority of Aussie mortgage holders will not be affected by rising interest rates, with many households holding older and smaller loans.
However, 14.6% of households have negative cash flow, which is a significant number and more than enough to negatively affect the direction of the property market.
This has all happened before…
This scenario of a large proportion of homeowners seeing their mortgage rates rise sounds familiar because it has all happened before.
During the Global Financial Crisis, millions of Americans saw their cheap “teaser rate” loans expire, forcing them to pay much higher variable rates.
This contributed significantly to the GFC and the US housing market crash.
Lending standards in Australia in 2023 are generally better than they are in the US, so it is highly unlikely that the Australian government and banks will follow the same path as the US.
Home foreclosures in the US peaked at over 923,000 during the GFC era due to high interest rates and the ‘Great Recession’.
Policymakers and banks in Australia are probably more likely to resume an extension-and-pretend strategy if a large number of borrowers find themselves in serious financial difficulty.
During the pandemic, borrowers were effectively able to kick the can down the road in the hope they would be able to resume paying their mortgages.
There was a swift economic recovery, $188 billion in funding to the banks at a mere 0.1 percent, and over half a trillion dollars in stimulus commitments.
It is more likely that in 2023, ‘Extend and Pretend’ will result in borrowers switching to interest-only loans, despite the fact that 30 year loans have become more normalised and that borrowers are retiring with mortgage debt.
Similarly to the pandemic, the fate of the “fixed rate mortgage cliff” and the ‘Extend and Pretend’ strategy will also depend heavily on the broader economies’ ability to cope with rising interest rates and high inflation.