Lessons learned from the “mortgage cliff”

The to and fro of economic news over the past three years has introduced Australians to a raft of fiscal concepts. Things like “pandemic-driven financial stimulus” and the risks of the “inflation spiral”.

But one facet that’s caused widespread panic among commentators has been the fixed rate “mortgage cliff”.

The mortgage cliff refers to the hundreds of thousands of fixed-interest bank loans established during our low-interest landscape in and around 2020 that are transitioning to variable interest rates. For most of those borrowers, their interest rate will increase by around four per cent overnight. That means for an average Australian home loan of approximately $600,000, the additional interest charge will be around $2000 per month.

Some reasoned that the ‘mortgage cliff’ was supposedly the pending catalyst for a devastating property price crash. They suggested a plethora of homeowners would be unable to meet their new loan commitments and would be forced to sell their properties. It was argued that this mass selloff would see an avalanche of distressed sales nationwide that would drive down values overall.

But the truth is, the fixed rate ‘mortgage cliff’ has proved to be more of a gentle lull.

A recent report in the Sydney Morning Herald noted that the ‘mortgage cliff’ may have already passed its peak, given RBA data that indicates most Australians had already transitioned from fixed to variable rate home loans. The information showed that approximately one million borrowers already pay a more expensive variable interest rate on their mortgages. In comparison, around 520,000 home loans are expected to roll onto higher interest rates in the second half of 2023, followed by a further 450,000 in 2024.

Yet, at the same time as the fixed rate ‘mortgage cliff’ has rolled through, property prices have risen. CoreLogic data showed national home prices rose 0.8 per cent in a month, 2.2 per cent for the quarter and 3.9 per cent for the year.

It appears the Australian borrowing public and our financial system are proving more resilient than some supposedly “educated” commentators thought they were.

So, what are some of the lessons to be learned from the ‘mortgage cliff/ and its demise that we can all apply in our lending arrangements?

Putting in place a margin for error across your financial considerations is a good thing.

Buffers can take all forms, from allowing for a higher interest rate to factoring in what we have in reserve for a rainy day. Our banking system already allows for stringent buffers when assessing home loan approvals. For example, they apply loan-to-value ratios and will implement mortgage insurance (to their benefit, I might add). Lenders also factor in your tolerance as a borrower for servicing an interest rate three per cent higher than what you’ll sign up for before they approve your application.

As an experienced mortgage broking business, we never suggest our clients borrow to their absolute limit.

Suppose you commit to taking out a loan at the very edge of your means. In that case, any unexpected event – an extended period of vacancy on your rental property, a major home repair or even personal illness or injury – will see you quickly descend into financial strife.

Even if you can potentially borrow $1 million, perhaps instead lower your expectations slightly to $900,000 and keep that refinance ability up your sleeve in case it’s needed.

As mentioned, buffers are important but having liquid funds on hand will help you quickly deal with the unexpected.

During the pandemic, Australians squirrelled away record savings. That war chest has proved essential in keeping households afloat in these more trying economic times. That’s doubly so for those who have already transitioned to variable interest rates. 

Make sure the funds are working for you but can also be accessed at a moment’s notice. For example, spare dollars held in an offset account work to lower your interest costs on a loan. You might also diversify into a share portfolio, which can be partially sold in an emergency – just make sure you aren’t investing in anything too risky.

There’s little doubt that having specialist advice on your borrowing arrangements can save you thousands of dollars. Mortgage brokers can also deliver strategies that ensure their clients avoid the fixed rate ‘mortgage cliff’. A qualified, experienced broker is well-placed to see the risk from a distance and act early so you can evade the pitfalls.

Intuitive Finance has helped multiple clients refinance their loan arrangements – either by renegotiating with their current lender or helping them move to a new one with more attractive terms.

Lean on your advisor because their guidance is worth a fortune in saved dollars and less stress.

It’s important that you understand the nuances of the loan terms you are signing up for. A loan document is a legally binding agreement and, in most cases, will run for years or decades.

Knowing, for example, when and what happens as you come off a fixed-rate period will ease the transition. You also need to understand fees and charges. For instance, will there be a financial penalty if you pay back the loan early? This could impact your decision to refinance with another lender.

Again, guidance from a mortgage broker will be essential.

The ‘mortgage cliff’ has made many of us more aware of the risks and reliefs surrounding our borrowing arrangements. And as is often said, those who don’t pay attention to history are doomed to repeat it.

If you want to learn more about how a mortgage broker can help you with your financial goals, book a complimentary meeting with one of our experienced brokers.

Finding a great broker requires a little effort on your part, but it will pay handsome dividends in terms of finance success. If you’re looking to secure funds for your next purchase, why not reach out to our team at Intuitive Finance for a chat.