Hundreds of thousands of mortgage holders are facing skyrocketing repayment costs over the next few months as their ultra-low fixed-term plans come to an end.
Borrowers who took out super cheap mortgages during the coronavirus pandemic are fast approaching a storm that will likely lead to much higher monthly repayments.
Analysts and financial pundits are skyrocketing home loan costs for those who “fixed” their mortgages at an all-time low at the start of Covid-19, as their generous terms expire over the next year.
It’s what many analysts call a ‘cliff’, with Canstar finance expert Steve Mickenbecker warning that up to 500,000 borrowers could reach that point overnight.
“Only those who have time left on their fixed-rate loan term will be spared,” Mickenbecker said.
“The increase in reimbursements may not seem exaggerated, but with wage growth having lagged, the rising cost of living will add to the financial strain on many households.”
The number of people taking out very low fixed rate loans has understandably increased in 2020 as the RBA cut borrowing costs to help the economy keep going.
The RBA has also repeatedly forecast that there will be no need to raise rates until 2024.
But to the astonishment of Governor Philip Lowe and his board — if not economists who have warned of such an outcome — a stronger-than-expected rise in inflation pushed the bull cycle forward.
The war in Ukraine and continued supply chain disruptions from Covid-19 forced the RBA this month to pull the trigger on the first of what are expected to be a number of rate hikes over the course of the year. coming year.
The May 3 cash rate target was raised for the first time in a decade, rising 25 basis points stronger than expected from 0.1% to 0.35%.
Several more hikes are expected to arrive over the course of 2022 and 2023, with Westpac flipping the cash rate target to peak at 2.25% next May.
Essentially, this means that those who in 2020 took out a three-year fixed-term loan – usually the most common period – now face a sudden increase in costs when those terms expire in 2023.
Mickenbecker says a common scenario could be people going from a fixed rate of almost 2% to a market where rates are 5% or more in one day.
In recent months, major banks have repeatedly raised the cost of fixed interest rate loans in the face of growing inflationary pressures and the growing likelihood of RBA action.
RateCity.com research director Sally Tindall ahead of the RBA hike in May said people who pegged their loan for years for less than 2% would “laugh to the bank” following the hikes, knowing that they are immune to any rate changes for at least another two years.
However, she said that “anyone who abandons a fixed rate is going to get an almighty shock when they see what the banks have to offer.”