Strategies for Getting Ready for the Fixed-Rate Mortgage Cliff
Australian homeowners are preparing themselves as interest rate increases draw the ‘mortgage cliff’ closer.
As the fixed-rate periods of up to 880,000 Australian households come to an end this year, they will face the challenge of finding additional hundreds or even thousands of dollars every month. The all-time low interest rates that have been enjoyed since the beginning of the pandemic will no longer be available.
Around 35% of the housing credit currently outstanding in Australia, comprising approximately 800,000 loans, entered 2023 on a fixed term. Of these loans, about two-thirds are set to expire this year.
In addition to the personal impact, the widely recognized “mortgage cliff” poses a substantial challenge for both the property sector and the broader economy. Bank data indicates that the peak period for mortgage rate resets is set to commence in July.
Until now, these borrowers were shielded from the impact of rate hikes by the Reserve Bank of Australia, which caused variable mortgage rates to surge upwards.
WHAT IS MORTGAGE CLIFF’S REVIEW?
In the upcoming months, a significant number of fixed-rate home loans, which were initially secured at historically low interest rates, will transition to higher variable rates. As a result, many homeowners will experience an increase of up to four percentage points in their interest rates. This phenomenon is commonly known as the “mortgage cliff” and has the potential to lead to higher repayment obligations for numerous households.
We got solutions for you!
HERE ARE YOUR APPROACHES TO PREPARATION
- ASSES YOUR BUDGET
This is to determine whether you can afford the new interest rate. Start by conducting a thorough assessment of your financial circumstances. Evaluate your income, expenses, and savings to determine how much you can afford to pay in case of an interest rate increase.
- STRESST TEST YOUR LOAN
Consider stress testing your mortgage by calculating how increased interest rates would impact your monthly repayments. This exercise will give you an idea of the potential affordability challenges you may face in the future.
- PLAN FOR RATE INCREASES
It’s prudent to plan for future rate hikes by stress-testing your mortgage repayments. Calculate how your budget would be affected if interest rates were to rise by a few percentage points. This exercise will help you identify potential vulnerabilities and make informed decisions.
- GET IN TOUCH WITH YOUR BROKER AT LEAST THREE MONTHS BEFORE YOUR FIXED-RATE TERM EXPIRES
The early you advise your broker, the earlier your broker begins making plans in advance regards to your current situation. If you don’t have a broker, consider finding one as they possess the necessary expertise to guide you through the process. They can provide valuable insights and guidance tailored to your specific situation. A professional can help you understand the potential impact of interest rate hikes and assist you in exploring suitable options.
- DISCOVER YOUR REVERT RATE AND NEGOTIATE WITH YOUR BANK TO LOWER YOUR INTEREST RATE.
Research the rates offered to new customers to assist you in the negotiation process for a reduced rate. Additionally, to save your time negotiating or doubting if you have enough knowledge and power to have an agreement with the bank, it is greatly advisable to let your broker do this for you. They have the negotiation power and access to a wide range lenders and banks’ products as part of their career. Bank to customer is a bit slow, service is limited prior to banking hours.
- CONSIDER CONSOLIDATING YOUR DEBT
If you have multiple debts, such as car loans and credit card balances, consolidating them into a single loan can enhance convenience and decrease your interest payments. Consult your broker to determine whether your lender permits this consolidation. This could help you mitigate the impact of the mortgage cliff by potentially reducing your monthly repayments.
REMEMBER: While the mortgage cliff poses a threat, it doesn’t have to turn into a catastrophe. Our team of experts is dedicated to assisting our clients in navigating this challenging period faced by those transitioning from fixed-rate mortgages.
Preparing for the mortgage cliff requires proactive planning and careful consideration of your financial situation. By taking these steps, you can better navigate the potential challenges posed by interest rate hikes and ensure a smoother transition during this period.
I hope you got a lot of value from the newsletter. If you need help to buy a property, purchase a vehicle or refinance a loan, don’t hesitate to get in touch.
BOOK A FREE APPOINTMENT
Kind Regards,
Shahmir Naqvi
0401 265 254
Disclaimer: The information provided above is on the understanding that it is for illustrative and discussion purposes only. Any party seeking to rely on its content or otherwise should make their own enquiries and research to ensure its relevance to your specific personal and business requirements and circumstances.
