Home owners braced for rate pain as slew of fixed rate loans expire

Nearly two years later, her repayments have almost doubled, from around $2800 to $4400 a month.

Faced with other bills and the rising cost of living, the mum of two said she has been forced to make many sacrifices "to survive".

Ms Sharma said her kids have had to give up extra-curricular activities, such as martial arts, and the family has even cut down on the amount of bread they buy.

Ms Sharma says she's planning to stick with a variable rate for now but she fears the rates will go up even further. If that happens, she said she will be looking to switch lenders.

"That's the only solution I have, because I already cut a lot of things. It's not easy to cut more because I don't want my kids to be starved for food," Ms Sharma said.

Many others are now bracing for their loan repayments to skyrocket as their fixed rates expire.

Justin McIlveen's clients are "well-versed" about the eye-watering jump in home loan repayments coming their way.

So far around a million borrowers nationwide have seen their repayments soar as the fixed rates they locked in during the pandemic when interest rates were at emergency low levels have expired.

A further 970,000 are facing the same painful transition in coming months, many of Mr McIlveen's clients at Scarlett Financial among them.

"Most clients are really well versed that rates have gone up significantly and they will be paying much more," the mortgage broker says.

"They don't like it, but they are aware of it."

The blow to the household budget involved is substantial.

A borrower with a $600,000 mortgage being repaid over 25 years may be facing an extra $1290 a month on their mortgage repayments, a hefty increase coming on top of the surge in living costs caused by current high inflation.

Unsurprisingly, Mr McIlveen and fellow mortgage broker Nick Lucey of Nest Advisory are finding that clients are pushing hard to get the best possible deal.

Three years ago that would have meant fixing the current rate for as long as possible.

But with home loan rates typically above 6 per cent that is hardly an attractive proposition.

Instead, both Mr McIlveen and Mr Lucey report that most clients are opting to switch to a variable loan.

Like any decision based on the future trajectory of interest rates, it is a gamble, albeit a relatively small one.

But in an environment where interest rates are thought to be at, or close to, their peak, switching to a variable rate makes sense.

And Canberrans opting for variable mortgages are far from alone.

Across the country, the share of borrowers choosing a fixed rate has plummeted.

During the pandemic, when lenders were offering loans for as little as 1.5 per cent interest, borrowers understandably rushed to lock in such low rates. During 2020 and 2021 the proportion of fixed-rate home loans soared well above 40 per cent, according to Australian Bureau of Statistics and Commonwealth Bank data.

But it has plummeted since the middle of last year as very low fixed rate terms have expired and interest rates have started to rise. By July this year, the proportion taking out fixed rate loans had dropped to the low single digits.

The central bank has held the official cash rate steady at 4.1 per cent for the past three months, stoking speculation that the succession of rate hikes has come to an end.

Many economists think that after raising its official cash rate by 4 percentage points in little more than a year, the Reserve Bank of Australia has done enough to bring inflation down.

Westpac chief economist Bill Evans is one of those, tipping that the RBA will leave the cash rate at 4.1 per cent for an extended period.

In fact, he does not expect any shift in monetary policy before August next year, when he predicts the central bank will start bringing interest rates down.

ANZ economists have a similar view, warning that although interest rates are likely on an "extended pause ... any monetary easing is a long way off".

But the Reserve Bank itself cautions against assuming rates will not go any higher.

In the minutes of its September board meeting, the central bank flagged that although high interest rates were working to slow demand, "some further tightening in policy may be required".

This depends on how the economy, particularly inflation, performs.

So far, the signs are promising. After peaking at 7.8 per cent late last year, the consumer price index has been steadily slowing, dropping to 6 per cent in the June quarter and, according to the monthly reading, growing by just 4.9 per cent in July.

While it has already done a lot to tighten monetary policy, the RBA is concerned the inflation remains well above its 2 to 3 per cent target range, and may take longer than hoped to come down.

"This could occur if productivity growth does not pick up as anticipated or if high services price inflation is more persistent than expected," it said.

Markets themselves currently put the chances of a rate hike by February next year at around 40 per cent.

Mr Evans, though, believes the threshold for a further rate hike is "quite high" given evidence that the economy is slowing, conditions in the labour market are easing and inflation is coming down.

Other major central banks appear close to the end of their tightening cycle.

The US Federal Reserve held its rate steady at its September meeting and although there is the chance of one more rate hike, its members have begun flagging the possibility of rate cuts next year.

The European Central Bank, meanwhile, believes it has tightened enough after delivering what could be its final rate hike in this cycle on September 14.

There have been concerns that Australia's interest rates are too low by comparison to those offshore, particularly the US, where they are in the 5.25 to 5.5 per cent target range.

But the RBA has been at pains to allay such worries, arguing in its latest board minutes that Australia's high share of variable mortgages means that borrowers here are paying higher rates than those in many other countries, including the US.

And the interest rate pain is continuing to build, even without any increase in official interest rates since June.

Commonwealth Bank economist Stephen Wu said the large numbers of borrowers coming off very low fixed rates onto much higher variable rates, combined with lags in the transmission of higher rates to those already on variable-rate mortgages, meant aggregate repayments were continuing to climb despite the current rate pause.

Waning competition between lenders is also contributing, according to the Reserve Bank.

The central bank estimates that strong competition up until June meant that the variable interest rate for borrowers was about 0.65 of a percentage point less than than they would have faced if all the increase in the official cash rate had been passed through.

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That is now changing and scheduled mortgage repayments are rising and claiming an ever bigger share of the family budget.

Since early last year, repayments as a share of household disposable income have jumped more than 2.25 per cent and reached a record high 9.4 per cent in the June quarter.

And the RBA reckons that will continue to climb as more come off fixed rates and competition between lenders continues to soften, reaching 9.8 per cent by the end of this year and rising to 10.1 per cent in late 2024.

It is a potent measure of the financial pain being felt by those paying off a home, and helps explain the weakness in consumer spending, which grew by just 0.1 per cent in the June quarter.

The grim news is any relief is likely still well into the future.

Australians face a long, hot and stressful summer.

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