"Those were lucky enough to fix their home loan anywhere in the 2% mark may face a huge spike in their repayments once their fixed term ends." - Alex Kenward, Finance Manager
Around two-thirds of homeowners still believe that Australia is in a property bubble that will likely burst soon as they come closer to a fixed-rate cliff.
That was the highlight of a recent Aus Property Professionals study, which also found that the sentiment was apparent and consistent across different age groups and state demographics.
Aus Property Professionals founder Lloyd Edge said the negative sentiment towards property is not surprising, given the success interest-rate hikes.
“Keep in mind that in order for a major housing market crash to happen we would need much higher unemployment rates and a huge oversupply of property,” he said.
“None of these things are occurring right now — inflation figures have fallen for a second month in a row, there is no sign of a recession at this stage and jobs data remains strong.”
Still, Mr Edge said the last 12 months have been very challenging due to the series of rate hikes which was not anticipated until 2023.
“It’s expected that the so-called mortgage cliff is due to hit in the second half of 2023- that’s roughly 800,000 homes that will be rolling off 2% fixed interest rates and moving on to 5% or 6% variable rates, leading some experts to predict a wave of defaults or urgent sales,” he said.
Managing the fixed-mortgage cliff
Mr Edge believes there are several strategies to tackle the mortgage cliff, including the following:
Reach out to a mortgage broker
The first step fixed-rate borrowers must take is to speak with their mortgage broker, who can provide them with options on how to tackle the likely switch to variable payments.
“Your broker might be able to help you refinance to a better interest rate, which will alleviate some of the pressure on you,” Mr Edge said.
“House-hacking”
Mr Edge said this refers to renting out a portion of the residential property to generate income that can be used to pay off monthly expenses and mortgage expenses.
“To get extra cash-flow coming in, you might want to consider renting out your spare room, or rooms, to help cover your mortgage repayments,” Mr Edge said.
In a recent Your Mortgage story, Suburbanite principal Anna Porter said AirBnb could save everyday Australians from rising day-to-day costs and mortgage payments.
“Whilst the banks typically assess borrowing at a higher rate, the current interest rates are at 11-year highs, so we expect to see a real squeeze on the budget as these fixed rates wear off,” she said.
Make additional repayments
Extra repayments will allow borrowers to reduce their principal, which will lower their interest costs.
“The extra repayments you make now will save you on interest down the track and put you in a better financial position for when your mortgage becomes variable,” Mr Edge said.
Build a savings buffer
The Reserve Bank of Australia notes that Australians still have a significant savings buffer, which will shield them from immediate impacts of rate hikes.
Mr Edge said a solid savings buffer of three to five months’ worth of essential expenses would be enough.
“This will ensure you feel secure and prepared for any unexpected financial challenges that might occur,” he said.
Transferring all savings to an offset account would also be beneficial, as it can lower the interest charged onto the home loan
“You’ll not only end up with a healthy savings buffer, but you’ll pay down more of the principal faster this way,” Mr Edge said.
Consider investing in cash-flow positive assets
For those who can afford to, getting an investment property with a high-rental yield can significantly help.
This, however, has become challenging given the high interest rates.
“A professional buyer's agent can help advise you on how to find properties with a high rental yield,” Mr Edge said.
Source: Your Mortgage