Wave of fixed rate loans expiring to hurt homeowners

A few hypothetical figures from the comparison website RateCity illustrate the story.

RateCity reports that the average three-year fixed rate for a major bank at the end of 2020 was just 2.08%.

If you assume the cash rate goes from 0.1% today to the forecast of 1.5% by the end of 2023 – as Westpac predicted – RateCity says that implies an interest rate “basic” variable mortgage of 3.64%. This is up 1.56 percentage points from the 2.08% rate reached at the end of 2020, which would add $356 to the monthly repayments of a $500,000 loan.

For a $1 million loan, RateCity calculates that a rate increase of 1.56 percentage points would increase monthly repayments by $712.

Obviously, these numbers are based on a scenario, and what will happen to rates this year and next remains uncertain.

Even so, the exercise raises legitimate questions: Will some of those who have locked in cheap fixed rates of less than 2% suffer a major financial shock at the end of their fixed terms? Will this lead to an increase in the number of homeowners suffering from mortgage stress?

The Reserve Bank of Australia has already downplayed this risk, pointing to banks’ stress tests on new borrowers.

“Fixed rate borrowers should be well positioned to handle potential higher interest payments at the end of their fixed rate term over the next few years as interest rate buffers built into capacity assessments loan repayment plans take into account potentially higher interest rates,” the RBA said last. year.

Typically, banks would have required customers taking out new loans to be able to repay an interest rate of around 5%, which is somewhat reassuring.

Many people who settled for 2% probably realized that rates wouldn’t stay that low forever. Even so, it’s also true that the day interest rates will rise much sooner than many homeowners expect.

So while bankers are optimistic that the vast majority of their customers can handle higher repayments, they also stress that any rate hikes should be gradual – something the RBA no doubt understands.

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Angus Sullivan, head of CBA’s retail banking arm, said last week the bank was focused on making sure customers are aware if they face a ‘reset point’ in their mortgages. .

“We know – and we’ve seen through our research and our data – that this helps tremendously. Nobody likes to be surprised. Nobody wants to wake up and suddenly realize things change for them in a month,” Sullivan said.