Households with fixed-rate mortgages face a shock surge in 2023

A dreaded deadline is fast approaching for many households and could spell widespread economic disaster.

Hundreds or thousands of mortgage holders will experience the sudden shock this year as they go from about 2 percent interest on their home loans to at least 5 percent in what is known as the “fixed rate mortgage cliff.”

That’s because many borrowers took advantage of the Reserve Bank’s record-low policy rate of 0.1 percent in 2021 to get ultra-low two-year fixed-rate repayments.

Many homebuyers face a year of financial distress as many mortgage deals with extremely low fixed rates are about to close

A Reserve Bank paper released in September revealed that 35 percent of home mortgages are frozen, much higher than the long-term average of 20 percent.

However, when those deals expire in 2023, it means borrowers will go straight back to an adjustable rate mortgage and see the sudden jump from the average fixed rate of 2.14 percent to 5.6 percent.

For a borrower with an average $600,000 mortgage whose monthly repayments would abruptly increase by at least 40 percent, that would be a $934 increase from $2,291 to $3,225.

Some borrowers who managed to snag rates below the average fixed rate could expect a jump of nearly 4 percent.

Lenders must assess a prospective borrower’s ability to absorb a three percentage point increase in variable mortgage rates.

Home equity borrowers who took out fixed-rate loans over the past year face a difficult time in 2023, as their monthly repayments increase by 40 percent, or as much as 60 percent in some cases

But since May, the RBA’s policy rate has already surged 300 basis points — the fastest rate of monetary tightening since the Reserve Bank published a policy rate in January 1990.

However, the bad news doesn’t end with the Big Four banks expecting at least two more rate hikes in the coming months, which would take the interest repayment rate to 6.1 percent.

RBA figures show that 50 percent of households who take out a fixed-rate mortgage in 2023 will have to pay 40 percent more immediately.

But more than 11 percent of households have to pay 60 percent more.

If interest rates double again, as widely expected, the RBA calculates that it would put 14.6 percent of mortgage holders at serious risk of default.

There are fears that the defaults could put severe pressure on the real estate market

The scenario sounds worrisome like the US housing crash of 2008, where widespread defaults left huge financial institutions in trouble and some even went bankrupt, causing loans to be frozen.

That situation is much less likely for Australian banks, which are subject to tighter lending regulations, but defaults could cause a real estate market slump.

Home equity borrowers would be forced to sell in an environment where banks could not lend as much, leading to falling home prices.

In a worst-case scenario, a property’s value could fall below the balance of the mortgage, a situation known as negative equity or “underwater.”

Real estate data giant CoreLogic’s Pain and Gain report predicted that “2023 will be a testing year for the resale market.”

“The majority of the outstanding fixed loan terms secured by the pandemic will expire by the end of next year,” it said.

‘This could lead to more motivated selling in a high-yield environment, even if home sellers are taking a loss.

‘The main risk is a continuously rising interest rate environment, as most of the outstanding fixed-rate loans expire by the end of next year.’

The Reserve Bank of Australia has hiked interest rates for eight straight months since May to a 10-year high of 3.1 percent, with further rate hikes expected next year to deal with the worst inflation in 32 years.