You may have heard people talking about a mortgage cliff recently. Usually an economist or academic, doing what they do best and warning about potential disaster in the housing market. So what is it?
Well, when the RBA pushed interest rates to an all-time low to stimulate the economy during Covid, borrowers were locking in fixed rates around the 2% mark.
Many of those had three-year fixed periods, which means that fast-forward three years and 11 RBA rate rises so far and a whole lot of homebuyers are going to go from paying 2% to paying more than 5% or even 6% in the next couple of months.
How bad could it be?
Finder estimates some $128 billion worth of mortgages will roll over from fixed to variable in 2023. Then, 2024 will see another $266 billion worth of loans roll over. RBA data suggests a total of 880,000 loans are set to roll over this year and 450,000 next year.
People who have been on standard variable loans the whole time will be well aware of what a year’s worth of rate rises can do to the household budget.
RateCity figures estimate that if there was another RBA cash rise as predicted, bringing the official rate to 4.1%, someone with a $500,000 mortgage would have seen their repayments rise by $1134 a month since April last year.
Of course, if a borrower had purchased an owner-occupier home during the Covid boom of the last three years, their mortgage would likely be two or three times higher than the above example.
Someone with a median priced home in Sydney would be looking at closer to $3000 a month extra, adding up to more than $30,000 extra a year in mortgage repayments.
So far, most people have been able to absorb this, especially as the pain has added up gradually. But imagine if that happened all at once. Here’s hoping they have a plan in place!
Another rate hike past 4% would be a significant event according to Louis Christopher of SQM Research.
Mr Christopher had forecast a year of gradual growth in values for 2023, which has been occurring so far, but said bets were off if the RBA went higher than 4%.
Such a hike would mean most borrowers who took out loans in the past three years would then be outside the APRA repayment buffer zone, which factors in 3% worth of interest rate rises.
They would then no longer pass the serviceability metrics and could be forced to sell their properties. A big increase in forced sales could see home values fall.
What can I do to prepare?
Many borrowers have been engaged enough to begin changing spending habits in the lead up to fixed rates rolling over.
It has led to a massive increase in refinancing in recent months.
And for good reason.
RateCity estimates that someone with a $500,000 loan who refinanced from the average deal to the best on market could save more than $6000 a year. That becomes $12,000 a year for a $1 million loan.
That will put a decent dent in the extra money a borrower needs to fork out each year in the higher rate reality.
RateCity research director Sally Tindall said those thinking of refinancing can maximise their savings potential by taking a few savvy measures.
First, look at your equity. If you have had your home loan for more than three years, you have likely increased your equity significantly.
Extra equity equals a better loan to value ratio and more negotiating power with banks for a better rate.
You should also consider asking your new lender to waive upfront fees. Lenders are facing strong competition from each other at the moment and may be prepared to sweeten the deal to get new customers.
And keep your eye on the deal you’re getting from your lender. Even if you get a new loan with a different bank, the honeymoon deal period will wear off at some point and they’ll try to do what banks do best…slug you with the lazy tax. Make sure you are on top of them to keep your deal competitive.