Borrowing overall costs to rise even if RBA holds as fixed-rate mortgages expire

More than 250,000 households will roll off cheap fixed-rate home loans in the coming 18 months, with overall payments set to rise even if the Reserve Bank is at the end of its hiking.

Hundreds of thousands of homeowners have already rolled off super cheap mortgages without triggering a sharp rise in defaults or arrears. Picture: NCA NewsWire / Max Mason-Hubers

More than a quarter of a million households will roll off cheap fixed-rate home loans over the next 18 months, a long tail of borrowers who will experience a big jump in repayments even if the Reserve Bank is at the end of its hiking cycle.

Homeowners during the pandemic moved en masse to fix their rates as lenders used virtually free money from the RBA to offer the cheapest mortgages in history.

With terms typically of two or three years and at rates below 2 per cent, hundreds of thousands of borrowers have been protected from the 13 rate hikes in the 18 months to November – the most aggressive series of rate rises since the late 1980s.

Analysts expect the RBA will hold the cash rate at 4.35 per cent at its Tuesday meeting, and will be looking for any sign in the accompanying statement that the central bank board has become more comfortable that inflation will return to the 2-3 per cent target range within a reasonable time frame.

While CBA head of Australian economics Gareth Aird predicted the first cut to come in September, “the message from the mortgage fixed-rate rollover is that the average outstanding mortgage rate will still climb, even with the RBA on hold”.

Mr Aird said the worst fears around the “fixed-rate mortgage cliff” had not eventuated, but that was not to say it wasn’t having an impact.

“It depends what people were worried about. If they were worried about a big rise in mortgage defaults, then the evidence suggests that’s not the case. If you were worried about it from the cashflow perspective and the impact on household consumption, then the evidence is that spending has shifted a lot,” Mr Aird said. Jarden chief economist Carlos Cacho estimated that over 60 per cent of 760,000 borrowers set to roll off fixed-rate loans over the four years to mid-2026 had ­already done so – about 480,000 households. That still leaves about 280,000 homeowners yet to make the switch.

So far, banks are reporting that customers rolling off cheap fixed rates to more expensive variable loans have made the transition relatively smoothly, having had 18 months to prepare.

CBA, for example, says 60 per cent of fixed-rate borrowers will pay at least 50 per cent more in repayments once on a variable rate. But the proportion of these customers falling behind on loans is slightly lower than for the portfolio overall. While mortgage ­delinquency rates remain below pre-pandemic levels, they pushed upward through 2023.

Moody’s Investors Service said in a recent report the share of borrowers falling 30 days or more behind on mortgages lifted from 1.05 per cent to 1.62 per cent last year.

Since the RBA commenced its rate hikes in May 2022, the total amount of mortgage repayments has increased by 44 per cent, versus only a 7 per cent increase in ­average weekly earnings over the same period.

“Arrears rates will continue to rise this year, given that increases in mortgage repayment costs have significantly outpaced ­income growth,” the Moody’s ­report said.

Booming property prices through 2021 combined with cheap loans led to buyers taking on substantially larger mortgages in 2021-22, which has left them more vulnerable to the steep rise in interest rates.

Moody’s estimates that, forced to take on more debt, the average homeowner who borrowed in 2021 or 2022 is now paying $10,000 more in annual mortgage payments than somebody who borrowed in late 2019.

Moody’s said those who took out loans during those two years “pose a particular risk”, not just because they face large debt costs, but also “interest rates for these borrowers are above the serviceability assessment rate, which is the measure lenders use … to ­assess homebuyers’ capacities to repay loans if rates rise”.