Glimmer of good news for homeowners facing a mortgage cliff

Homeowners who fixed their mortgage rate at rock-bottom levels will save as much as $20,000 compared to if they had stayed on a variable loan, new modelling shows, a boost to mortgage holders preparing for higher repayments.

Much has been made of the looming cliff, as many owners prepare to refinance next year and pay hundreds of dollars more per month. But new analysis shows the benefit to those who chose fixed instead of variable after the pandemic hit.

Someone who fixed for two years in July last year would save $20,353 in interest payments compared to someone on a variable rate, RateCity modelling shows.

Forward thinkers who fixed rates at 1.94 per cent will pay $18,815 in interest by 2023, compared to homeowners on variable rates, who will pay $39,168. The data assumes homeowners have a $500,000 mortgage and have another 25 years to pay it off.

It also takes into account the Reserve Bank’s latest hike on Tuesday, taking the cash rate 0.25 percentage points higher to 2.85 per cent – the seventh hike since May.

Some economists predict it will peak as high as 3.85 per cent by March next year, taking average mortgage rates just above 6 per cent.

Rate City research director Sally Tindall said those who had fixed their loans last year were now “laughing all the way to the bank”.

“A lot of people talk about the fixed rate cliff [where people will face much higher rates after the fixed period], but people on a fixed rate are in a much better position,” Tindall said. “They have time on their side to do something about it.”

Tindall said homeowners with fixed rates could save more, or have time to pay down their mortgages.

Those who had a fixed rate had to meet tougher requirements, including higher interest rate buffers, before qualifying for the loan, standing them in good stead to be able to repay at a higher rate, she said.

But some may not be able to refinance after reverting from their fixed rates, as they may not qualify to borrow as much as they had before interest rate rises began in May, locking them into a “mortgage prison”.

The latest interest rate hike will add an extra $74 per month for those on a variable loan, with a $500,000 mortgage, Tindall said, or a total of $760 per month from all seven interest rate rises.

Sydney-based Atelier Wealth director and finance broker Bernadette Christie-David said current home buyers were looking at both fixed and variable rates, with fixed rates not as attractive as they were more expensive.

“At the moment, variable rates are still considerably cheaper than fixed rates, and fixed rates have been increasing since January,” Christie-David said. “Since February fixed rates have been more expensive.”

Buyers looking for a variable rate were often having conversations about how much their borrowing power could be cut with each interest rate rise.

“If you’re borrowing $800,000 now, an announcement of a 0.5 per cent rise in the cash rate could mean it drops by $50,000, so you can only borrow $750,000,” Christie-David said.

Westpac senior economist Matthew Hassan said while some homeowners would be feeling the pain, it was necessary to have such a sharp rise in interest rates because of inflation.

The latest figures put Australia’s inflation at 7.3 per cent and the RBA aims to lower it to between 2 per cent and 3 per cent.

The Reserve Bank said in its statement on Tuesday that higher interest rates and the rising cost of living were putting pressure on household budgets.

“Inflation turned out to be much stronger than anticipated,” Hassan said. “And with the formidable inflation challenge, it very quickly became clear that having interest rates of near zero was completely inappropriate.”

Interest rates should have been lifted early in 2021, but with the uncertainty of COVID-19 they weren’t, he said, leaving the RBA to play catch up.

Hassan said though interest rate rises were hitting house prices across the country, it was hard to answer whether they were helping to curb inflation.

Inflation was not just being influenced by local buyers, but also international markets, where product supply challenges were lifting demand and prices locally, he said.