A senate committee looking into cost-of-living pressures has shed light on the size of the anticipated ‘mortgage cliff’ set to test the property market in 2023.
The head of the Reserve Bank Australia’s Economic Analysis Department, Marion Kohler told the senate committee that around a third of outstanding housing credit is fixed-rate, according to the ABC.
“We think about half of that is due to roll off in the coming year,” she told the committee.
Dr Kohler said it was difficult to estimate how many loans that percentage represented.
“The team is actually looking further into that, but you need to do a little bit of back-of-the-envelope calculations,” she said.
Despite that difficulty, Dr Kohler was able to share an estimated figure with the committee.
“The number is somewhere in the high 800,000s that you would be looking at,” she said.
She cautioned that the figure might not mean there are 800,000 individual mortgage holders likely to be affected.
“But that is not 800,000 households necessarily — there are people who have more than one loan facility, they might have taken out a loan with different banks or you have a split or variable rate loan … but that is really a rough back-of-envelope calculation,” she said.
Borrowers at risk of mortgage stress
Dr Kohler’s estimation finally puts a figure on the speculated mortgage cliff that property experts have said will test the resilience of house prices this year.
That’s the term used to describe the large number of loans expected to transition from low fixed rates to a much higher variable rate.
Comparison website Finder has previously estimated this transition could add as much as $10,872 a year, on average, to mortgage repayments.
Many borrowers locked in record-low fixed rates during the pandemic but a series of aggressive cash rate rises by the RBA has meant variable and new fixed-rate loans have risen substantially.
Head of Consumer Research at Finder, Graham Cooke said the fixed mortgage cliff is a scary prospect for a lot of borrowers.
“Hundreds of thousands of Aussies will be hard hit, with many facing mortgage stress if they aren’t adequately prepared,” Mr Cooke said.
“This is a very significant spike in repayments that many will simply not be able to afford.”
Fixed-rate mortgages hit a peak of 46 per cent of all new home loans in July and August of 2021.
Rate rises necessary
Dr Kohler told the senate committee that while the bank was aware the increase in the cash rate was hurting some households, it was a necessary move.
“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.
“However, higher interest rates are necessary to ensure that the current period of higher inflation and cost-of-living pressures does not persist too long.
“As the governor (Philip Lowe) has emphasised, the Reserve Bank Board is focused on returning inflation to target and establishing a more sustainable balance of demand and supply in the Australian economy.”
