What the Australian Mortgage Cliff Means for You

As we approach the middle of 2023, many Australian homeowners are facing the prospect of their fixed-rate home loan terms ending.

Over the last three years, hundreds of thousands of borrowers opted for fixed-rate home loans due to the historically low interest rates being offered. When these fixed loan terms expire, many borrowers will be faced with significantly higher repayments if they allow their home loans to revert to their lender’s standard variable rate. This impending steep change in repayments is commonly referred to as the ‘mortgage cliff’.

In this article, we’ll explain what this mortgage cliff is, what it means for you and how you can prepare for it.

What is the Australian mortgage cliff?

The Australian mortgage cliff is a term used to describe the significant increase in home loan repayments that many Aussie borrowers are likely to endure due to their fixed-rate loan terms ending. These borrowers locked in low fixed interest rates between 2020-2022 when the cash rate was historically low. This offered homeowners the security of a fixed mortgage repayment schedule for the duration of their loan term (typically between one and three years) when rates were around 2% or less!

The Reserve Bank of Australia has projected that by the end of 2023, around 23% of all Australian home loans that currently have a fixed interest rate, will transition to a variable rate. As these deals near their end, homeowners will likely face an increase in their mortgage repayments, due to the fact that rates have increased significantly since homeowners locked in their fixed-rate deals. Increase in repayments may be substantial and could place significant financial pressure on homeowners who are not prepared for it.

It’s important to understand that the mortgage cliff is not just a problem in Australia, but a phenomenon that is affecting homeowners all over the world. However, Australia is in a unique position compared to other economies around the world. For example, Australia has one of the lowest fixed-rate markets in the world by value in current outstanding loans but considering a large portion of home loans (23% to be exact) are due to expire soon, this leaves many economists worried about what may happen once this occurs. As the Australian economy continues to recover from the impact of the COVID-19 pandemic and high levels of inflation, interest rates are likely to continue rising in 2023, which will result in increased mortgage repayments for homeowners.

How can homeowners prepare for the mortgage cliff?

Preparation is key in minimising the impact of the mortgage cliff, so here are some steps that homeowners can take to prepare:

  1. Calculate the difference in repayments: Use one of our mortgage calculators to determine how much your mortgage repayments are likely to increase by, if your loan was to revert to your lender’s standard variable rate. This will give you an idea of what you need to budget for, and will help you to determine whether you need to make any financial adjustments.
  2. Refinance your home loan: Consider talking to your mortgage broker about refinancing your home loan – that is, changing your loan to a different fixed-rate product, a different variable rate product, or changing lenders altogether. You may be able to secure a more competitive interest rate than your lender’s standard variable rate, and find the security and/or flexibility that you desire.
  3. Make other financial adjustments: If you’re not able to refinance, you may need to make other financial adjustments to accommodate for the increase in your mortgage repayments. This could include reducing your spending on non-essential items, increasing your income through a second job or side hustle, or reducing your debt. For some great tips on this, click here for 26 clever ways to reduce your cost of living.
  4. Work with a mortgage broker: A mortgage broker can be an invaluable resource in helping you survive the mortgage cliff. They can help you understand your options, compare mortgage deals, and negotiate with lenders on your behalf. To ensure you’re prepared, we recommend you reach out to a MoneyQuest mortgage broker several months before your fixed-rate term is due to expire.

By taking these steps, homeowners can prepare for the mortgage cliff and minimise its impact on their financial situation. It’s important to remember that preparation is key, and the earlier you start planning, the better positioned you will be to weather the mortgage cliff storm.

How a mortgage broker can help navigate the mortgage cliff

Working with a mortgage broker can be incredibly helpful for homeowners who are approaching a mortgage cliff. Mortgage brokers specialise in helping individuals find the right home loan for their needs, and can educate clients about their options. Mortgage brokers provide:

  1. Expertise and knowledge: Mortgage brokers have an in-depth knowledge of the mortgage market and are up to date on the latest mortgage deals and interest rates. They can help you understand your options and find the right mortgage to suit your needs.
  2. Access to a wide range of lenders and products: Mortgage brokers have access to a wide range of loan options from different lenders, as opposed to lenders who can only offer their own institution’s products. This means that mortgage brokers offer more choice and increase your chances of finding a deal that is right for you.
  3. Negotiating power: A mortgage broker has the experience and expertise to negotiate with lenders on your behalf. They can help to secure an interest rate that better suits your circumstances, fight for more favourable terms and lower fees, and potentially save you money over the life of your mortgage.
  4. Simplified process: Mortgage brokers simplify the home loan application process. They handle all the paperwork and negotiations for you, saving you time and effort.

The mortgage cliff is a significant event for many homeowners in Australia and it’s important to be prepared for it. So whether you’re facing the mortgage cliff or simply looking for an interest rate that better suits your needs, your local MoneyQuest mortgage broker is here to help. Click here to get in touch today

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