“Since we got the mortgage we’ve had two kids, there was that additional cost there, so we were already stretched thin, so it was quite a large hit to the budget,” Tim Smith said.
What is the mortgage cliff?
The Smiths are not alone in experiencing what’s called the ‘mortgage cliff’: a sharp increase in one’s monthly home loan repayments when the fixed interest period on their loan ends.
While some mortgagees initially avoided the financial impact of rate increases due to having fixed interest rates, about a million fixed-rate loans in Australia have since reverted to lenders’ standard rates. Hundreds of thousands will follow over the next 12 months.
From record lows to financial woes
When fixed-rate loans revert to a lender’s standard rate, the interest rate could potentially go from something with a two in front of it to something with a six in front of it.
Mortgage stress increasing in Australia
“Spending half of a household’s monthly income on a home loan may seem staggering, however, the shift from the COVID-era of ‘free money lending’ and ultra-low rate loans to much higher rates in such a short space of time means that this stress is not entirely surprising.”
In the Smiths’ case, when their interest rate reverted, the small amount of savings they had was quickly depleted.
“We cut back on things like going out, eating out. We had to be mindful of any spending, put off holidays and had to juggle the bills coming in as they have also gone up,” Smith said.
What to do if you are under mortgage stress?
“There are short-term measures that can be undertaken with the help of the lender, like extending the term of the loan, moving to an interest-only period or a repayment holiday.
“However, it is important that borrowers talk to their lender and consider getting advice from the government’s National Debt Helpline.”
“We made sure we didn’t borrow right to max, we actually could’ve borrowed a lot more but we didn’t,” he said.
Reducing the risk of mortgage stress
While the Smiths initially tried to get their lender to reduce their interest rate, the bank would only go so far. With the help of a mortgage broker, the Smiths moved their home loan to another lender who offered them a rate of 5.49 per cent.
“In August, the value of loans refinanced to a new lender was 12.6 per cent higher than a year ago,” he said.
Where to from here for interest rates?
“Westpac, ANZ and NAB are all betting on a rate cut from September onwards, and the latest cuts to one and two-year fixed-rate home loans across the market support this view.”
“We monitor these pressures closely and we know people are under the pump,” he said.
https://www.sbs.com.au/news/article/tim-and-rebekahs-monthly-mortgage-repayment-increased-by-about-800-overnight/vrgroopr6 Mortgage cliff leaves homeowners financially stressed