The Reserve Bank now fears 800,000 Australians on a fixed mortgage will face a major shock in 2023 when their ultra-low rates expire.
Since May, the RBA has raised the cash rate eight times and economists are expecting another quarter of a percentage point rate rise on February 7 that would take the cash to a new 10-year high of 3.35 per cent, up from 3.1 per cent.
Borrowers who fixed their mortgages for two years in 2021, when the RBA cash rate was still at a record-low of 0.1 per cent, are most at risk with many of those fixed loan periods due to expire in 2023.
This would see their monthly mortgage repayments abruptly surge by 50 per cent, or $1,114 for a borrower with an average $600,000 home loan who is coming off an ultra-low fixed rate of 2 per cent and moving on to a new 5.26 per cent variable rate mortgage.
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The Reserve Bank of Australia now fears 800,000 Australians on a fixed mortgage will face a major shock in 2023 when their ultra-low rates expire (pictured is a Melbourne auction)
Asked about expiring fixed-rate loans, Marion Kohler, the RBA’s head of economic analysis, said ‘back of the envelope calculations’ showed ‘the number is somewhere in the high 800,000 that you’d be looking at’.
Mortgage cliff pain
$500,000: Up $929 to $2,765
$600,000: Up $1,114 to $3,317
$700,000: Up $1,300 to $3,870
$800,000: Up $1,486 to $4,423
$900,000: Up $1,671 to $4,976
$1,000,000: Up $1,857 to $5,529
Based on a borrower moving from a fixed loan of 1.95 per cent to a variable rate of 5.26 per cent
‘That’s not 800,000 households necessarily, there are people who have more than one loan facility,’ she told a Senate hearing on Wednesday.
‘Around one third of the housing credit is fixed rate and we think half of that is due to roll off in the coming year.
‘This is quite a difficult question to answer.’
Dr Kohler said her figure included borrowers who had a split variable and fixed-rate loan.
Little more than 18 months ago, in May, 2021, Australia’s banks were offering average fixed rate mortgages of just 1.95 per cent.
But once those fixed rates expired, borrowers would be pushed on to a variable mortgage rate, now at 5.01 per cent among the big banks, RateCity calculations show.
Another rate rise in February would take that to 5.26 per cent.
Should rates rise again next week, a borrower with an average $600,000 loan would see their monthly repayments abruptly climb by $1,114 to $3,317 from $2,203, if they had fixed their entire mortgage in 2021 to take advantage of previous record-low interest rates.
A working couple paying off a $1million mortgage would see their repayments soar by $1,857 to $5,529, up from $3,672.
Since May, the RBA (Gpvernor Philip Lowe pictured) has raised the cash rate eight times and economists are expecting another quarter of a percentage point rate rise on February 7 that would take the cash to a new 10-year high of 3.35 per cent, up from 3.1 per cent.
Economists are widely expecting interest rates to rise again on February 7 because inflation last year surged by 7.8 per cent, the fastest pace in 32 years which is well above the RBA’s 2 to 3 per cent target.
‘We understand that some people are finding the rise in interest rates difficult to manage and others will have to cut back on discretionary spending,’ Dr Kohler said.
Higher interest rates are starting to affect economic activity with retail trade diving by 3.9 per cent in December, despite it being Christmas.
This marked the first monthly fall after 11 consecutive increases in the Australian Bureau of Statistics data.
Dr Kohler suggested more interest rate rises were likely, with Westpac and ANZ forecasting three more increases that would take the cash rate to 3.85 per cent.
‘Higher interest rates are necessary to ensure that the current period of higher inflation and cost of living pressures does not persist too long,’ she said.
The RBA’s Financial Stability Review last year estimated 60 per cent of fixed-rate mortgages would expire by the end of 2023.
The Reserve Bank data showed 35 per cent of borrowers had a fixed mortgage, with almost two-thirds of them set to expire this year.