Home loan interest: a new threat for fixed-rate mortgages

Borrowers who are battling with high mortgage interest rates should think twice before fixing right now. Here’s why.

Aussies with home loans have yet to feel peak pain from the dreaded mortgage cliff, but already a new threat is emerging.

The cliff, caused by almost 900,000 borrowers this year reverting from low fixed rates to variable rates about 4 percentage points higher, is set to add more than $1200 a month to mortgage repayments on a $500,000 loan and $1800 for a $750,000 loan.

Low fixed rates benefited hundreds of thousands of borrowers who locked in low interest two or three years ago, but will burn those who haven’t planned for the sudden spike.

And just as that fixed-rate mortgage cliff hits hard, borrowers who fix face a fresh challenge in the next year or two.

Variable and fixed rates are currently close, but anyone fixing now risks being caught out by Reserve Bank interest rate cuts that could arrive in 2024 as inflation slows back towards its 2-3 per cent target range.

This month’s Australian Bureau of Statistics inflation numbers were lower than expected, at an annual rate of 4.9 per cent – well below the 7.8 per cent annual inflation rate reported in December 2022.

Interest rates have piled up since May 2022, but fixing now may be risky. Picture: iStock

If inflation keeps falling this fast, rate cuts could come sooner than expected, and that will hurt fixed-rate borrowers.

If you fix for two or three years at today’s rates near 6.3 per cent, when official interest rates fall people with variable-rate mortgages will do better because their repayments will fall too.

And if you try to exit a fixed-rate mortgage following RBA cuts, you could be forced to pay your lender hefty break fees.

Fixing was a brilliant move in 2020 and 2021, and I’m jealous of those who did it, but now it’s wise to think twice.

Fortunately, borrowers appear to understand this, and the huge proportion of people fixing a few years ago has dwindled to a trickle.

Fixed rates still offer certainty for those who want to know exactly what they will pay.

And it still may be a wise move if rate rises resume and the price you lock in is lower than what is to come. But most economists only expect one more rate rise at most this year, with many declaring we already are at the RBA’s peak.

The RBA kept its official cash rate on hold on Tuesday following governor Philip Lowe’s last board meeting in charge. It was the third straight month our central bank has sat on its hands.

The biggest worry about fixed-rate home loans right now is that many people who locked into them don’t exactly know what awaits them when their mortgage reverts to variable rates.

New research by AMP Bank found seven out of 10 homeowners with a fixed-rate loan did not know what their variable rate would be, and one quarter did not know when their fixed rate was due to expire.

AMP Bank’s study also found that most homeowners kept savings in a separate bank account, even though it makes more financial sense to use an offset account to cut interest costs and save tax.

As more fixed-rate pain looms, it’s a good idea for borrowers to brush up on mortgage strategies.

Originally published as Home loan interest: a new threat for fixed-rate mortgages