Is the cliff on the horizon?

We’ve heard a lot of talk about the ‘fixed-rate mortgage cliff’.

But what does it actually refer to?

As we know, mortgage rates fell substantially during the pandemic. Fixed term home lending has historically comprised around 15% of new home loans. However, as interest rates fell to record lows, the attraction and popularity of fixed term home loans surged to comprise 46.0% of new mortgages issued in July and August of 2021.

In October, the RBA reported that about 35% of home loans were on fixed terms, including split loans, and around two thirds of these will expire in 2023. This has now become dubbed the ‘cliff’.

So how worried should we be about the expiry of fixed-rate terms?

Below is an example of what it will look like.

Average loan size	$538,936
Fixed rate April 2021	1.98%
Variable rate April 2023*	5.48%
Monthly repayment under fixed term	$1,986.63
Monthly repayment under new variable rate	$3,053.26
Data source: average loan size is the national figure reported by the ABS. Average interest rates as reported by RBA for owner occupier. *Current average variable rate adjusted for a 25 bp lift in February and March. Mortgage repayments assume a 30-year loan term.

Interestingly though, as interest rates have increased since May last year, borrowers on variable rates have on the whole managed to absorb the rise in repayments. With almost 70% of mortgage debt being on variable rates, it is thought – and most likely hoped – that those on fixed rates will be able to manage the rate shock, notwithstanding the expectation of further rate rises for both cohorts.

Data so far is not uncovering significant signs of mortgage stress but these changes usually take time to take full effect. However, in order to counter added financial pressure, lending institutions implement all sorts of measures and alternatives to avoid repayment default by their mortgagors. For example, 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 and there did not appear to be any material impact on the property market by the time those deferrals expired.

Australians with fixed-rate loans will no doubt be confronted with a painful adjustment period as their loans transition. However, while figures are returning positive news so far, the results over the remaining months of the year, as these conditions kick in, will be the true test of the market.

Notably, listing numbers remain low and appraisal numbers are up, indicating more property owners are considering selling, suggesting that more property may come on the market soon. There is solid competition at the moment, which is helping prices to remain buoyant, but as listing numbers increase this may ease off.

The property market traditionally sees a boost in activity leading up to Easter – although this trend was distorted during the COVID years – so we should expect a spike in listing over the next couple of weeks.

Whilst the market is showing some encouraging signs, it’s too early to say it has bottomed out. Question marks over interest rates, supply, affordability and ‘the cliff’ prevail, leaving even leading experts disagreeing about the future.

What we do know, however, is that there are always lifestyle, financial and personal reasons to buy and sell, so the real estate market will continue to tick over. The question to answer is whether this decision will be a purely commercial one for you.

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Published March 1, 2023

By Belinda Cassano