Since the start of the year, there has been a lot of talk about an impending “mortgage cliff”. This has been in response to rapidly rising interest rates, which have undergone the steepest increase on record. It has also reflected underlying concerns about the stability of the property market and what a sharp downturn could mean.
However, reports suggest we have now passed the peak of the cliff, and the market has seen no significant impact. Given how dire many experts made the situation seem, this is quite surprising, and it begs the question – what happened? Were we worried about nothing or is the worst still to come?
Here we try to answer these questions by taking a closer look at the concept of the mortgage cliff. As part of this, we will explore what people expected to happen and the effects we have actually seen. We will also share our top tips for any mortgage holders worried about navigating their own mortgage cliff.
What is the mortgage cliff?
The term “mortgage cliff” has been used to describe the sudden jump in interest payments many mortgage holders are facing. Specifically, it refers to the sharp increase experienced when rolling off a low fixed rate onto a higher variable rate. This phenomenon is the result of the unique lending conditions we have seen over the last few years.
In response to the global pandemic, the RBA dropped the cash rate to a record low 0.1%. This was an emergency measure designed to help protect the property market against the economic uncertainty that COVID created. And it worked extremely well, with buyer activity skyrocketing as many looked to make the most of favourable lending conditions.
But, as the world began to open up again, trying to control inflation became the RBA’s top priority. To do this, they used one of the only tools they have at their disposal – the cash rate. Through a string of increases, in a little over a year, they lifted it from 0.1% to 4.1%. Mortgage providers responded to this by passing on these increases to their customers in the form of higher interest rates. Many even went a step further, adding a little extra to some of the increases as they implemented them.
The full impact of this was not felt straight away, as most mortgage holders locked in lower rates. In fact, almost two-thirds (around 64%) of the mortgages taken out while interest rates were at record lows were fixed. This was significantly above the long-term average of approximately 15% of mortgages being fixed rate.
However, fixed rates generally only apply for a few years, and revert to the lender’s variable rate after this period. This means that many mortgage holders are seeing their interest rate increase by up to 4% or more, effectively overnight. Depending on how much they have borrowed, this equates to hundreds – if not thousands – more in monthly repayments.
The mortgage cliff – a practical example
In July 2020, John and Miranda bought an apartment to live in. To make the most of the favourable lending conditions, they fixed an interest rate of 2.2% for 3 years. When their fixed period expired in July 2023, their bank offered them a reduced variable interest rate of 5.5%.
This has meant that their monthly mortgage repayments have increased by almost $1,500. They are now weighing up their options as this is placing significant strain on their household budget.
What impact is the mortgage cliff having?
Until relatively recently, commentary on the mortgage cliff was quite negative, with many predicting dire consequences for the property market. This was based on the belief that most mortgage holders simply would not be able to afford their increased repayments. As such, they would have no choice but to sell, flooding the market with urgent sales and driving down prices.
However, so far, the mortgage cliff does not seem to have had any real effect on the market. What we have seen is investors leave the market, this might be due to various factors including higher interest rates. In the areas we service, the supply of new listings remained low with prices actually increasing in some suburbs. This suggests that mortgage holders are choosing to refinance, rather than move on.
Importantly, while lenders are reporting a slight increase in mortgage arrears, levels still remain comfortably below the long-term average. This also supports the belief that mortgage holders are managing to make their increased monthly payments work. However, reductions in discretionary retail spending suggest that some tightening of household budgets has been required.
It is also worth noting that, according to the latest lending figures, most mortgage holders have returned to variable rates. This reflects the broadly held hope that rates are unlikely to get much higher and should start to fall soon.
While rates have held steady for three months, we have seen an uptick in new listings during the spring period, which suggests values may begin to ease and buyers will have more choice.
How can you manage the mortgage cliff?
Depending on your financial situation, you may just be able to absorb the increase in your monthly mortgage payments. If not, there are a few simple things we recommend you do:
- Take a close look at your finances: Finding the extra space in your household budget could be as simple as cutting back on non-essential spending. However, any “belt tightening” you are considering must be sensible and sustainable, and comfortably cover your increased costs.
- Consider your long-term plans: If covering your increased mortgage payments will require some compromises, you need to be sure they will be worth it. If you want to stay in your current property for the foreseeable future, some short-term pain may be worthwhile. However, if you were already thinking about moving on, it may be better to bring these plans forward.
- Seek independent advice: A financial adviser will be able to provide an objective assessment of your situation and the options available to you. They will also be able to recommend ways to optimise your finances and make your payments more manageable. If you cannot afford to engage a professional financial adviser, the National Debt Helpline is a free financial counselling service.
- Talk to your lender: If you are struggling with your repayments, adjusting the terms of your mortgage could make them easier to manage. For example, extending your loan term or switching to interest only should bring down your minimum monthly repayment amount. Depending on your situation, your mortgage provider may also agree to defer repayments, though this may just delay the issue.
Want to discuss this further?
For more information on navigating the mortgage cliff, contact Local Agency Co. today. Our team of property experts can work with you to better understand your unique situation and the options available. As part of this, we can also provide detailed advice on what you should expect if you choose to sell.