‘Cliff’ looming for fixed mortgages as interest rates rise

Reserve Bank of Australia governor Philip Lowe announces a lift in interest rates last week. Picture: Getty Images

A record number of home loan borrowers who “fixed” at historically low rates will face rocketing home loan costs as early as June next year.

Fixed mortgages boomed in recent years with the fixing trend taking off in June 2020 after more than a third of all new mortgages “locked in at rock bottom rates, according to financial research group Canstar.

Industry analysis shows fixed mortgages jumped from traditional portions close to 15 per cent to nearly half of all mortgages at the peak of the trend – the most popular fixed term has been three years, which corresponds with the so-called fixed mortgage “cliff “ emerging early next year.

Steve Mickenbecker Canstar says industry data pinpoints August 2024 as the looming high point of the wave corresponding to three years after the fixing trend reached its highest point at 46 per cent of all new mortgages in August 2021.

“We are going to see mortgage holders coming off fixed rates near 2 per cent to find themselves facing a market where rates may be above 5 per cent,” says Mickenbecker.

“It will be very tough – they can’t do nothing – it is looking like rates will be more than double the rate they are used to. They must either fix again at higher rates or simply move across to variable rates which will also be much higher than anything they are used to,” Mickenbecker suggests.

Just last week in the rate increase announcement Reserve Bank of Australia governor Philip Lowe signalled that a 2.5 per cent official cash rate would not be so surprising this time next year – a 2.5 per cent RBA rate would indicate standard variable rates from the major banks could be above 6 per cent in 2023. Fixed rates are most likely to be higher still. On a $500,000 home mortgage the recent 0.25 per cent change added $65 a month to mortgage costs, but a move up to 2.5 per cent would cost an extra $600 a month.

Fixed rate volumes in the banking industry tripled when big banks began offering exceptionally low rates in 2020 and 2021.

Traditionally variable rates are higher than fixed rates, the exception was the Covid lockdown period when the RBA offered the banks artificially lower funding costs which allowed fixed mortgages to be cheaper than variable products.

The fixed rates also became attractive as the headline rates dropped – fixed rates were testing 10 per cent around the time of the global financial crisis before bottoming last year near 2 per cent – today variables are already around 3.35 per cent (with last week’s rate added for principal and interest) while three-year fixed rates are closer to 4.5 per cent.

Variable rates are priced off the RBA guidelines but longer- term rates are priced off international bond and money markets.

Financial advisers suggest that fixed rates will now return to their traditional role as an alternative for home loan borrowers who wish to know their repayments well in advance – rather than a speculation that fixed rates offer any particularly bargain over variables. Moreover, they warn not to expect fixed rates to drop below variables again any time soon.

Tim Toohey, head of macro and strategy at Yarra Capital Management, explains: “Our banking market had a historic average of 15 per cent of mortgage books being fixed – when this large group of fixed-rate loans come to an end it will be an unfamiliar dynamic in this market – it might also coincide with a soft patch in economic growth.”