The Federal Treasurer has been warning households to batten down the hatches for tough economic times ahead, and it’s no more relevant than the rapidly approaching fixed-rate cliff confronting many homeowners.
During the pandemic fixed interest rates hit record lows and Australian banks wrote somewhere in the vicinity of 1.2 million new home loans during that period.
The rates were so low that more borrowers than usual opted to take fixed rates, cashing in while they could.
Fixed term borrowers usually make up around 15 per cent of new home loans but this figure jumped considerably, up to around 45 per cent during pandemic times.
The reason there is a cliff approaching borrowers hurtling towards it in their fixed rate home loan vehicles is because around two-thirds of the 35 per cent of outstanding housing credit that are on fixed rates come off those fixed rates this year.
When these fixed terms come to an end, those borrowers will need to refinance their loan and they face interest rates that are now approaching the much higher 6 per cent mark.
Things are expected to start getting real in April after loan sizes grew significantly in that month in 2021, and those higher loan amounts will be much harder to service under these higher interest rates.
As of now, most new home loan borrowing is being taken out on variable rates, with only 4.9 per cent being on fixed terms in December of last year.
This means most borrowers will be at the mercy of fluctuating interest rates going forward, and will be hoping the cash rate peaks soon and starts to come down by the end of the year, which some pundits have predicted.
The housing market has yet to show data that reflects a scene in distress, but with so many Australian borrowers about to drop off this cliff, they will be feeling some pain, which is what the Reserve Bank is trying to achieve with its monetary policy to reduce inflation.
Whether this housing distress data starts appearing will depend on how households handle their ‘fall’ off their fixed interest rate cliff throughout the rest of 2023.