Pity Australia’s fixed rate mortgage fools

Pity the poor Australian home buyers who went out and borrowed to the hilt based on the Reserve Bank of Australia’s (RBA) 2020-21 guidance that they would not lift interest rates until 2024.

As shown in the next chart, a whopping $145 billion worth of mortgages were originated at a debt-to-income (DTI) ratio of six or above over the four quarters to March 2022:

Australian high debt-to-income lending

High leverage borrowing soared over the pandemic.

Many of these borrowers would have taken out fixed mortgages at rock bottom rates of around 2%:

Australian fixed rate mortgages

Fixed mortgages boomed over the pandemic.

Mortgage rates have already risen sharply, meaning that fixed rate borrowers that took out cheap mortgages over the pandemic are already facing more than a doubling of rates when it comes time to refinance:

Average fixed and variable mortgage rates

Fixed and variable mortgage rates surging.

To illustrate, the next table illustrates the difference in mortgage repayments between a borrower paying an interest rate of 2.1% (the pandemic low average fixed rate) and the current discount variable mortgage rate of 4.7%:

Australian mortgage repayments

Fixed rate borrowers are already facing a 38% lift in repayments when it comes time to refinance – a figure that will only rise as the RBA hikes rates.

The AFR’s latest survey of 31 economists revealed a median forecast for the official cash rate of 2.35% by December and a peak of 2.85% by mid next year. If true, then the average discount variable mortgage rate would lift to 6.2% by June 2023. In turn, a borrower rolling off a 2.1% fixed rate mortgage which face a 63% lift in repayments:

Forecast mortgage repayments

According to CBA analysis, around $500 billion worth of fixed rate mortgages are due to refinance across Australia by the end of 2023.

Thus, a significant chunk of Australia’s mortgage market are facing a crippling rise in mortgage repayments, which will push many into severe financial stress and weigh heavily on consumption spending.

The fixed rate mortgage cliff is another reason why the RBA won’t lift rates as much as economists nor the markets are forecasting. Monetary conditions will tighten even without further action from the RBA.

Unconventional Economist
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Comments

  1. C.M.BurnsMEMBER

    don’t worry Leith, APRA made sure that the banks were dilligently assessing loans based on the ability to repay (said loan) at much higher interest rates than they were initially offering the punters. Because of course, all sensible and right-thinking people understood that home loans are for 25 years and the never seen before in the history of man-kind, ultra-emergency rates were only for ultra level emergencies… and that given the economic recovery signals in late 2021, assuming said ultra emergency interest rates would remain for 2 more years of economic recovery was… well…

    but I’m with you, its all totally Glen’s fault. And nothing at all to do with APRA ! Or the banks themselves, or old mates Joshy and SFM who pressured APRA to reverse their polices ! And the people who took out these loans, well, they are beyond reproach !

    • Yes, plus the super withdrawals.
      The Reserve Banks forecasts have been impeccable for a long time. That’s well known.
      Unfortunately for these borrowers who believed the Reserve Bank’s interest rate forecasts, this is the first time the Reserve Bank has issued an incorrect forecast.
      I am sure they would have done some research on the previous Reserve Bank forecast form and would have found a record as superb as Black Caviar’s. Never made an incorrect forecast. Beyond reproach those borrowers, who could have known the Reserve Bank could ever make an incorrect forecast? First time its happened.
      .

      • No they lie and incite.I well remember feckin Gen Stevens out there telling us to borrow, borrow, get out and borrow. Stop whinging about house prices the interest rate is so low….Etc. We were so damn lucky. Remember tbe great Aus film, The Bank, came out just before the Twin Towers so was dimmed instantly and inappropriate but won 9 AFI awards and the farmers drummed their heels on the cinema floor shouting encouragement. https://www.ozmovies.com.au/movie/bank It’s getting time to watch Wenham again, the grown up farm kid ready for revenge.

  2. “a whopping $145 billion worth of mortgages were originated at a debt-to-income (DTI) ratio of six or above over the four quarters to March 2022:”
    So responsible lending is all the go? That statement tells everyone what really happened. The banks don’t do responsible lending & probably never will.
    Ultra low interest rates for ultra long period for ultra no real reason & then lend to punters at 6 * income. What could possibly go wrong & no-one could possibly have anticipated a future problem?
    BS!!- everyone knew this was a problem & everyone turned a blind eye.
    Banks (the CEO’s, management & the board) should be held accountable as should the Government employed regulators. Totally willfully blind & incompetent. Dereliction of duties would be a kind insult.

  3. OnsmokoMEMBER

    Central banks wouldn’t continue to raise rates into a recession, would they?

  4. pfh007.comMEMBER

    Taking advantage of record low interest rates was not foolish when the monetary policy maniacs were insisting that ZIRP and NIRP were the future and howling at the RBA for not gutting interest rates even more quickly.

    But what IS foolish is not exiting those transactions if you believe ZIRP and NIRP are not returning any time soon.

    It is not difficult to sell a house right now if you are prepared to meet the market.

    Once sold you can relax and rent and watch prices fall further.

    But if you agree with the monetary policy maniacs and expect that ZIRP and NIRP will return as soon as the ALP flood labour markets with cheap imported labour and supply chains with police state serf factories resume normal operation, then you would be a fool to sell your foot on the ladder to subsidised wealth just because you must temporarily cut down on Shiraz and wagyu.

    • UpperWestsideMEMBER

      “It is not difficult to sell a house right now if you are prepared to meet the market.
      Once sold you can relax and rent and watch prices fall further.”

      Yes but ….
      You are born short a place to live..
      A burst of high Inflation can destroy anyone still renting in their old age.
      So if you have covered your modest retirement property needs all good
      you can sell that huge house and rent
      but if not, think more broadly about what can go wrong

      • pfh007.comMEMBER

        Yes, if you believe ZIRP and NIRP are coming back soon then don’t sell even if you do have to cut back on some avocado for a while.

          • pfh007.comMEMBER

            For a while is the length of time before you believe ZIRP and NIRP will return. Which depends on whether you are a transitory inflation true believer. There seems to be a few of them.

    • Holiday In ScomodiaMEMBER

      ‘Relax and rent’… rental market is hellish, even if you are cashed up and have dual good incomes- saw this last year first hand. Part of the system to drive people into said crazy mortgages…

      • pfh007.comMEMBER

        True but if you have a large mortgage and you don’t expect inflation to be transitory then that is a very special kind of hell.

  5. “According to CBA analysis, around $500 billion worth of fixed rate mortgages are due to refinance across Australia by the end of 2023”.
    Just in time for the next rate cut cycle. No need to panic.

  6. Prediction: The RBA will bravely send us into a nice fat recession, and then shrug and say “whocouldanode?” as they enjoy their big fat remuneration packages.

  7. What a f#@%ing un necessarily mess the rba apra Feds have made. (Though they had plenty of friends around the world.)
    What difference a 0.5, 0.75 or 1.0 rates have made? Other than a more sustainable property market?
    0 percent rates gave us nothing but asset bubbles, debt and servitude as some sort of substitute for sustainable economic policy.
    Has any of it been productivly invested?

    Sack them all.

  8. 2023HomelessMEMBER

    I’m hopeful as rates rise, delinquency will follow. Then APRA will get it’s own review. Their collusion with the Gov to remove the Hayne RC changes under the dark of COVID panic was horrendous. Here’s hoping the RBA puts rates up enough to show the failings of APRA in the form of delinquency and a bank issue. Not because I want people to lose their homes, but because the sooner regulatory oversight is fixed, the less likely an economic depression is (if it’s not already baked in).

    • C.M.BurnsMEMBER

      +1000
      for whatever wrongs the RBA can deservedly be blamed with, APRA have been culpable of much worse for much longer

      • This. APRA’s fault for allowing DTI ratio’s and % of high risk book to grow. Punters and banks were just following the APRA rules, if a punter could pass the rules it was assumed it had been stress tested appropriately. Not the fault of the consumer to be all knowing and all wise on future recession or hyperinflation odds.

        Most just looked at the cheap rates and said, cool, lets lock it in for a few years and get a place to live in, beats paying rent.

  9. The institutional memory for the RBA is, adjust rates –> instant impact on borrow rates –> instant impact on consumption. This time around an unusual amount of fixed rates has been entered into. Their models won’t handle this. Pretty much an overshoot is baked in

    • They jumped the shark with the TFF, it simply wasn’t needed with massive cash splash, people/banks binged on low rate fixed mortgages. Everyone should have been smarter, especially RBA and APRA – they should be less corruptible than poli’s.

  10. MattymacMEMBER

    Anyone happen to know the split between investors and owner occupiers in the fixed rate maturities?

  11. I must be conditioned because I don’t think $1.6m for an average home is a lot anymore. During the beginning of the pandemic I thought any ordinary wage earner was nuts contemplating buying a $1.2m home. I live in SA so these prices are extraordinary for us and yet the market keeps climbing. House next to me just sold for 1.49m a week ago and yet 3 weeks ago did not even attract an opening bid at auction. Auctioneer started bidding at $1.3M. Crazy and yet it continues. Spoke to a mate agent yesterday who sold a 300sq m block in my neighbourhood for over $702k last week. He said he sold the same block last yr in July for $525k. Crazy again.
    Whilst I agree with Leith that RBA won’t raise OCR beyond 2 to 2.5% I hope I am wrong and they overshoot and blow the frigging lights out. Hard lessons need to be learned and I for one am sick of bailing out others through smashed interest rates on my savings, volatile super balances and unaffordable homes for my kids.

    • Well said.
      Don’t think I’ve seen a single post BTL in support of MB’s view.

    • Problem is – if it really crashes your savings may get bailed in, super balances will be destroyed and your kids wont have the jobs to be eligible for the debt needed to buy.

      I dont see how this resolves any of your wishes and I also dont know how anyone protects themselves apart from having unencumbered assets which will be worth something into the future.

      • Most people can’t seem to see this. The consequences of the deflation required to reset all debt levels is disastrous. Lending markets frozen, government services stopped, money in banks bailed in or frozen. you can’t have long term deflation in an inflationary monetary system without destroying society.

      • It won’t be the end of the world if market crashes. There are fixes – it’s just that governments won’t implement them because someone is going to get hurt. Better that we all share is some misery – right?
        The problem with the property market is that it’s the biggest game in town and the politicians are knee deep in it.
        No game lasts forever – at some point you run out of luck or the establishment closes for the night.
        If we don’t do anything because we can’t envision or contemplate the fall out what do we do?
        Nup – let it burn.

  12. Ah, yeah! They would have been so much better off by not having fixed rate loans.
    Variable all the way. That’s the way you do it, money for nothing, chicks for free..

  13. Good old ‘Straya has managed to pump prime inflation and yet it’s not really caused by wage increases, so people are really hurting more as costs go up, interest rates go up and wages go down effectively. Even savers with money in the bank aren’t really going to win big, as the interest is taxable and the rest is failing to keep up with inflation, but there must be winners, those who sold their excess houses in the past 12mons might be laughing at seeing a chance to buy back in eventually.

  14. My wife feels unsettled because she has just realised that this financial year, for the first time, we are making a (small) profit on our IP’s so we will have to pay extra tax instead of getting a refund. I tried to explain that this is only a temporary situation, for one or two years, before things return to “normal”. She seems to be blaming it on the switch from IO to P&I. LoL!