08.09.2023 Local News

Is A Fixed-rate Mortgage Cliff Looming In Sydney’s Eastern Suburbs?

Is A Fixed-rate Mortgage Cliff Looming In Sydney’s Eastern Suburbs?

More than 800,000 Australian borrowers come off low-priced fixed-rate home loans this year.

How will this affect the property market here in Sydney’s eastern suburbs?

The height of the pandemic – 2020 and 2021 – was a great time to fix your home loan. With some lenders offering short-term fixed-rate loans at under 2% interest, almost half of Australia’s borrowers took the opportunity to fix their interest rate.

Over the next year or so, up to 80% of those fixed-rate terms will end. And when that happens, many borrowers are likely to find themselves paying a lot more for their home loans.

We explore what this ‘fixed-rate cliff’ is likely to mean for the property market here in Sydney’s eastern suburbs.

Why did home loans go so low?

When the pandemic first struck, and lockdowns were happening, there was widespread concern about the possibility of a deep recession.

To help prevent this, the Commonwealth government introduced measures such as JobKeeper and tax relief. The RBA tried to stimulate the economy by reducing the official cash rate to an emergency level (0.1%).

The RBA also offered a special three-year ultra-low funding rate to lenders. Many chose to pass this on to borrowers in the form of special fixed-rate home loans, which went as low as 1.95% in early 2021. These low-rate loans tended to last two-or-three years, with most slated to end this year or early next.

In the meantime, of course, the RBA has been aggressively hiking interest rates, taking the official cash rate to 4.1%. This means when borrowers do come off their home loan, they’ll be entering a very different interest rate environment.

In fact, the average standard variable interest rate is now as high as 6.63%, and the average three-year fixed-rate loan is a staggering 7.88% – almost a full 6% higher than borrowers could get three years ago.

How much more are borrowers going to have to pay?

How much this impacts borrowers depends on the size of their home loan, as the table below shows.

Mortgage size Monthly repayments where interest rates 2%* Monthly repayments where interest rates 6.5%* Difference
$500,000 $1,848 $3,160 $1,312
$1,000,000 $3,696 $6,321 $2,625
$1,500,000 $5,544 $9,481 $3,937
$2,000,000 $7,392 $12,641 $5,249

* Assumes a 30-year principal and interest home loan paid monthly with no additional costs

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Given that in 2021, the monthly payments on a median home loan throughout the eastern suburbs was already over $3,000, most local borrowers face rises in the thousands of dollars – something that could strain many household budgets.

Those who bought most recently – and have had to take out larger home loans – are also likely to be the most impacted when their fixed-rate home loans end.

What impact are we seeing so far?

So far, we’ve noticed only a limited effect on the property market here in Sydney’s eastern suburbs. Most people are still paying off their mortgages, and there haven’t been too many distressed sales.

What we have noticed, however, is a growing number of investment properties coming to market, with some investors having rising interest rates eat into any profits. This is impacting the entry-level and apartment market, where we’re gradually seeing more listings.

However, generally, supply still remains tight, and prices are rising. CoreLogic data shows the median Sydney property price lifted 4.5% in the June 2023 quarter alone.

The only way is down?

While interest rates have been rising rapidly, there may be some cause for optimism.

Most economists agree we’re at, or at least near, the peak and that the RBA is unlikely to push the official cash rate much higher. In fact, many believe it may start cutting rates soon, bringing the official cash rate back to around 3% within the next 12-to-18 months.

That’s because the main reason the RBA has been lifting rates has been to curtail inflation. There are encouraging signs it has now peaked. The underlying rate of inflation was 0.8% in the June 2023 quarter, down from 1.4% in the March 2023 quarter and 1.9% in the December 2022 quarter. This means interest rate rises may have had the desired impact, and rates can start easing.

If this happens, it should help homeowners continue to meet their repayments and encourage new buyers into the market.

Want more?

If you’re thinking of buying or selling in Sydney’s eastern suburbs, get in touch.