Fixed-rate cliff passes the peak: CoreLogic
While the majority of fixed-rate loans created through COVID-19 have expired, arrears remain low, new data has confirmed.
Despite a notable slowdown in economic activity and housing market momentum in response to higher rates, the risk of arrears and default in Australia’s mortgage market is well-contained, according to CoreLogic.
This low arrears data is particularly crucial as a significant proportion of fixed-rate loans have transitioned to variable rates, resulting in increased mortgage debt.
Given the average fixed rates with terms of three years or less bottomed out at 1.95 per cent in May 2021 for owner-occupiers, average variable rates for new owner-occupier borrowers are now 5.66 per cent. The risk is that some borrowers will struggle to service their loans on the new, higher, variable rates, head of research Eliza Owen said.
Ms Owen explained that for the average loan size in May of 2021 ($549,498) on a 30-year loan term, this represents an increase in monthly home loan repayments from $2,017 per month to $3,175 or an increase of almost 60 per cent.
The surge in fixed-rate borrowing through COVID-19 is partly attributed to the Reserve Bank of Australia’s (RBA) alluding to prolonged low interest rates until 2024.
In a recent address to the House of Representatives standing committee on economics on 11 August, outgoing governor Philip Lowe expressed regret for not fully comprehending the pandemic’s implications earlier, stating: “We didn’t fully understand the nature of the pandemic and how long it would last and what the implications would be.
“If we had, we would have had a better understanding and we would have responded differently.”
Most fixed-rate loans have a term of three years or less, resulting in the highest number of expirations projected for this year (880,000), followed by an additional 450,000 next year.
Mr Lowe indicated that approximately 1 million borrowers have already transitioned off their fixed-rate loans, with another million expected to follow suit.
CoreLogic’s data highlighted the initial expansion of fixed-rate lending during the early stages of the pandemic, peaked at 46 per cent of secured housing finance in July and August 2021, marking a notable rise from pre-COVID-19 levels of 15 per cent.
However, new lending patterns have since shifted back towards largely variable terms.
Eliza Owen emphasised: “This means a vast, and increasing majority of housing debt, is on variable rates.”
And unlike fixed-rate mortgage holders, variable-rate borrowers have already experienced the brunt of cash rate increases.
“While variable-rate mortgage holders have been feeling the pinch of rate rises and high cost of living pressures, official data suggests arrears remain in check and are still below pre-pandemic levels,” she said.
In addition, rising home values since February have likely only further reduced the incidence of loans in negative equity.
While the risk of default remains low as home values rise, the passing of what is likely the final RBA rate hike to households with mortgages could lead to a slight deterioration in housing market conditions if new listings continue to increase, Ms Owen explained.
“The good news for mortgage holders is that this period of economic slowdown will also take the RBA closer to its long-term inflation target, which could be the impetus for a reduction in the cash rate in the second half of 2024, as predicted by most major banks,” Ms Owen said.