Has the fixed rate mortgage cliff fallen short?

The fixed rate mortgage cliff was one of the scarier predictions made about this year. However, new data from CoreLogic reveals that our worst fears about the fixed mortgage cliff may not have happened – nor are they likely to. 

Indeed, even the current Reserve Bank of Australia governor Philip Lowe admitted the fixed mortgage cliff has been largely nonexistent, explaining that borrowers coming off low pandemic-era fixed rate home loans haven’t had any more trouble making repayments than variable ones. 

In theory, this is great news. There hasn’t been a cascade of home loan defaults that could herald a recession, nor has there been a significant spike in distressed home sales or negative equity. 

But don’t celebrate just yet: thousands of fixed borrowers still have yet to come onto variable rates, and mortgage stress is still high.

So is the fixed mortgage cliff something to worry about? Or is the drop-off more gentle?

The so-called “fixed rate mortgage cliff” was coined to describe the price shock Australian households would experience due to the unprecedented expiry of 1.3 million low-rate fixed home loans throughout mid-2023 to mid-2024. 

This was the risk: a larger-than-normal percentage of home loan borrowers took out fixed rate mortgages between mid-2020 and 2022, given that fixed interest rates fell to historic lows. These mortgages were mostly set for 1- to 3-year terms. 

This shielded a large portion of the property market from the effects of recent RBA rate hikes. Borrowers on variable rates have had to cope with 4.00% worth of rate hikes, and the corresponding increases to their mortgage interest repayments – fixed borrowers haven’t.

However, the majority of fixed mortgages are set to expire this year, which means they risk rolling onto new variable rates 3% to 4% higher. This sudden shock to mortgage repayments could theoretically spiral into an affordability crisis as borrowers struggle to cope with costs.

Even at the height of fixed-rate popularity in early 2022, fixed rate home loans accounted for just 40% of all credit. This means the vast majority of home loans in Australia are variable rate, and, therefore, already exposed to RBA rate hikes. As fixed terms expire, the market's share of variable rates only grows larger daily. 

Fortunately, this means we’ve largely already seen how borrowers have coped with rate hikes. Many have fallen back on savings, refinanced their home loans to a lower rate mortgage, and/or adjusted their lifestyle to meet the demands of mortgage repayments.

Data from the Australian Prudential Regulation Authority (APRA) shows that arrears (or late repayments) make up only 1.2% of outstanding loan debt. This number is extremely low, and much lower than pre-pandemic levels (1.6%). 

Admittedly though, this number has climbed up a bit from September 2022 (1.0%), showing that rate rises have applied pressure to household budgets. But CoreLogic head of research, Eliza Owen, says that payment arrears “are not necessarily a timely measure of mortgage stress.” 

“Not only is the APRA data slightly lagged,” explains Owen, “but measuring late payments means there is an additional lag on the data, where those struggling with higher housing costs tend to prioritise housing payments, and may take a while to actually miss a payment.”

Indeed, representatives from major banks claimed in a parliamentary hearing that the vast majority of borrowers have been resilient to RBA rate hikes – which the banks have eagerly passed along in full.

This doesn’t mean the housing market isn’t under stress. Cracks have instead appeared in the larger economy, namely by a plummet in consumer spending and sentiment and a loss in household saving ratios. 

Housing values – which grew significantly throughout the start of 2023 – have also cooled their enthusiasm, and sales stock bounced +2.8% in July despite a lacklustre number of buyers, indicating that homeowners may be selling to escape hefty repayments.

But perhaps what has helped us avoid the worst of the fixed rate cliff was that rate hikes – and the cliff itself – have been so heavily telegraphed. 

“The vast bulk of Australians are sensible. They knew this was coming,” said RBA governor Philip Lowe in a parliamentary hearing last week. 

“It has gone smoothly, but that doesn’t mean there won’t be problems down the track.”

CoreLogic’s Eliza Owen supports Lowe’s caution, saying that as the last rate rises flow through home loans, there may be a “mild deterioration” in the property market.

However, as the RBA inches closer to the cash rate peak, homeowners at least can look forward to the prospect of an extended rate hold, and – if conditions favour it – a rate cut in late 2024. 

Compare low rate home loans in the table below.