What is the fixed rate mortgage cliff?
The fixed rate mortgage cliff is a term used to describe the end of the fixed-rate period of a home loan. When you take out a fixed-rate mortgage, you agree to a set interest rate for a specific period, usually between one and five years. At the end of this fixed-rate period, your interest rate will revert to the lender’s standard variable rate. This standard variable rate can be significantly higher than the fixed-rate, leading to a potentially significant increase in your mortgage repayments.
The fixed rate mortgage cliff has become more prominent in Australia in recent years due to the large number of borrowers who have taken out fixed-rate mortgages. According to the Australian Bureau of Statistics, almost 20% of all new loans were fixed-rate mortgages in November 2021. As a result, many borrowers will be facing the end of their fixed-rate period in the coming months and years.
How will the fixed rate mortgage cliff impact Australian households?
The end of the fixed-rate period will impact Australian households in a few different ways. Firstly, borrowers who took out a fixed-rate mortgage with a low interest rate may find that their new standard variable rate is much higher. This can lead to a significant increase in mortgage repayments, potentially putting strain on household budgets.
Secondly, the end of the fixed-rate period may coincide with other changes in a borrower’s financial situation, such as a change in employment or a new addition to the family. This can make the increase in mortgage repayments even more challenging to manage.
Finally, the fixed rate mortgage cliff may also impact the wider economy. If a large number of households are facing an increase in mortgage repayments, this could lead to a reduction in consumer spending, which can have flow-on effects on businesses and the broader economy.
What steps can borrowers take to prepare for the fixed rate mortgage cliff?
There are several steps that borrowers can take to prepare for the fixed rate mortgage cliff. Firstly, it is important to be aware of when the fixed-rate period of your mortgage is due to end. You should contact your lender or mortgage broker well in advance of this date to discuss your options and to consider refinancing or renegotiating your mortgage.
Secondly, it is essential to review your budget and ensure that you can afford the increase in mortgage repayments. This may involve making changes to your spending habits, renegotiating other bills or expenses, or exploring options to increase your income.
Finally, it is a good idea to seek advice from a professional mortgage broker or financial advisor who can help you to navigate the changes in the mortgage market and find the best options for your individual circumstances.
The fixed rate mortgage cliff is a significant change in the Australian mortgage market that will impact many households in the coming months and years. By being aware of when your fixed-rate period is due to end, reviewing your budget, and seeking advice from a professional, you can prepare for these changes and ensure that you are in the best possible position to manage your mortgage repayments.
