What is the fixed rate cliff and what you can do to prepare?

A common recurring nightmare for people to have is that they are falling. It’s one of those things that a great portion of the world’s population finds terrifying.
So what better way to portray a potential economic disaster than by calling it a fixed-rate mortgage cliff?
The image conjured up is of borrower after borrower plummeting off the edge and into the deep abyss of financial ruin.
So, what is the fixed-rate mortgage cliff?

One big rate hike

Three years ago, as the world obsessed over Covid-19, interest rates were lowered until they hit an all-time bottom. Banks were offering super low fixed interest rates on their loan products to get customers on board.
Many borrowers locked in those rates on two and three-year fixed periods. So, when the RBA began hiking rates around this time last year, and everyone on variable rate home loans began getting slugged with increased repayments, those people who locked in at a low rate carried on unaffected.
Fast forward to now, and most of those fixed periods are set to expire in the next few months. This means around 880,000 mortgages will soon go from paying 2-2.5% interest to 5.5% or more. The result is that the affected borrowers will be paying thousands of extra dollars a year on their mortgages. Some people will be paying tens of thousands extra.

What does it mean for the market?

The effect of the fixed rate cliff on the market is the subject of great debate. Some argue it will lead to an uptick in distressed sales, which could see significant price and value falls across the nation’s property markets.
Others claim it will have less impact, saying that it will rather ‘normalise’ the level of mortgage delinquencies to their long-term average of between 1 and 2%, after years of historically low rates saw them much lower than that mark. When you consider that 880,000 mortgages accounts for a moderate percentage of Australia’s adult population, plus that people have had a lot of time to prepare for the rises, and that property listings are well down on previous years, it’s possible that most of the distressed listings will be absorbed by a pool of active buyers that are currently out there with not enough property to choose from.

What can you do to prepare?

Borrowers often split their loans between fixed and variable, which means that a lot of people approaching the cliff may only have a percentage of their loan exposed to 3% plus rate hikes. These people will have spent the last year adjusting to the extra repayments on the other portion of their loans, so won’t be completely taken by surprise.
One thing that record numbers of people have been doing is refinancing. Banks are competing hard for business in this market and a refinance to a new lender offering introductory discounts or even cashback refinance deals to new customers could see you offset a significant percentage of the extra repayments you will need to make later in the year.

Work backwards

Another way to approach it is to look at how much extra you will be paying and then figure out what tweaks you can make so that you make up the difference without too much grief.
It is estimated that people with a $500,000 mortgage will need to come up with around $810 extra a month, which works out to around $187 a week. That’s $27 a day. When you break it down like that, think of the things you could do each day to make a difference of $27. It could be a case of a couple each having one less café-bought coffee per day and bringing their lunch from home and hey presto, you’ve made up the difference.

Consult the experts

Zinger’s Financial mortgage brokers can arm you with more information and keep you on top of your best options for refinancing or structuring your finances the best way. If it all seems too much and the fixed mortgage rate cliff has you spooked, reach out for a conversation – we’d love to be able to help you reach your financial goals.


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