We used to refer to pre-covid and post-covid – where the world opened and we all got back to normal…

No-one could see property prices increasing to the highest levels in history and that created FOMO for many buyers. The Fear of Missing Out meant families borrowed to their maximum when interest rates were under 2%…

Fast forward two years – and welcome to reality. Interest rates are going back to where the average is. Historically the average for interest rates sits at a little over 6%, so we aren’t even at that point yet. But for many, they will be swallowed up by the banks well before then.

On a positive note, self funded retirees are finally seeing a return on their savings after many years of almost getting zero percent.

Gotta love the Reserve Bank of Australia (RBA)

Mr Lowe gave false hope when he said in early 2022 that interest rates wouldn’t start increasing until 2024 at the earliest, but once those inflationary numbers came out, they increased hard and heavy – much to the surprise of all of us. Oops, they made a mistake!

With around 35 per cent of mortgages on fixed rates and the vast majority set to expire over the next two years, a substantial proportion of borrowers face some challenges.

And hence the term – “Mortgage Cliff’ was created…

To explain this in simple terms, hundreds of thousands of borrowers took their borrowing to the maximum level from 2020 to mid 2021, when fixed interest rates were 1.79% – 2.00%. And now, this month onwards, those fixed rates are expiring and those borrowers are going to jump to around 5% – after this months 0.25% increase.

That’s over double and almost triple for some borrowers.

Add to that:

• Fuel is over $2
• Groceries have jumped up massively
• Electricity has doubled
• Airplane tickets have doubled and then some
• Beer is going up this month by 25% in taxes
• And so on…

It’s safe to say that, thousands of borrowers are going to struggle to keep their head above water.

Let me put some numbers behind what I am talking about

Mum and Dad Home Loan 

• Borrowings of $1,000,000 taken out in 2021..
• Fixed rate of 1.84% at the time – due to expire in May 2023.
• Minimum repayment at 1.84% is $3588 per month.
• New interest rate after the Feb increase, with another in next couple of months, takes it to $5895 per month – Based on a rate of 5.59% come May 2023 – thats only another 2 rate increases of 0.25%
• That’s $532 extra per week this household budget reduces by…
• Plus all the extra costs to just live each week

Now if these borrowers, borrowed their maximum they could afford to buy this house 2 years ago, where are they going to find the extra $532 plus extra costs to live each week.

Imagine if they had a child during that time, and now have 1 dependant and one on the way…

And for those investors:

• Investor borrows $400,000 in 2020.
• 3 years Fixed interest only @ 2.69% – monthly interest only loan repayment of $897 per month
• Fixed and Interest only expiry in June 2023
• Current P & I rate today (Feb 2023) = 5.59%
• Lets assume a 0.75% increase in interest rates – 6.09%
• They are now looking a principal and interest repayment of $2584
• that’s an extra $1687 per month in repayments…

Just imagine if this investor has more than one property…

I used these two examples, as they are live examples of clients who have their fixed rates due to expire this year.

For all our customers who have fixed rate mortgages – we will be emailing everyone of you ASAP with budget tips and the new minimum repayment – so we can table a chat to talk budget now – as talking once you are on the variable rate with the higher repayment, well that could be too late.

How do you handle the changes?

Regardless of whether you refinance your loan, you will be paying higher interest charges than before, but there are some ideas you can use to perhaps assist with adjusting to the changes.

The next blog coming in a week is going to give you tips on what you should be doing now to get ready.

For our existing customers – we will be reaching out directly – if you would like to chat – click here to book in a time

What will this do to the Market?

This is the clincher – how will these changes flow into the property market?

We have already seen the pull back – why – this is due to serviceability – what does that mean?

Well what a borrower could borrow 12 months ago is very different to what they can borrow now due to the increased rates – as they increase, the borrowing capacity will reduce for every borrower looking to borrow to purchase.

We will see Mortgage stress in some areas as showing effect in the second half of 2023 and onwards… and more so in markets that have high mortgage levels.

There are areas the property commentators will refer to as the ‘Mortgage belt’ this means, highly leveraged households.

Highly leveraged – meaning – large home loan borrowings in comparison to income – high debt to income ratio, those same customers generally have multiple credit cards, car leases and worst still, After-pay or Zip Pay…

For many of them, it’s already too late. They are already going to lose their home as they are in negative equity territory (mortgage is higher than property value). So, if they can’t afford to pay the loan, they can’t sell because the debt is higher than the value of their home plus, they cannot refinance as they do not service the debt in the eyes of the lender. They are essentially stuck and waiting for the receivers to come knocking.

For those with cash – sit tight…The world isnt ending – its time to ride the wave for now, and pick the right markets.

The east coast saw the biggest jump in prices over the last few year and some areas beyond affordability – its now the time that those prices will come back in line with affordability. Not all markets are set to lose value – its isolated to each area, always keep that mind.

You all know our details, make the call… Or book in a time via our website for a confidential chat.