Are homeowners ready for the mortgage cliff?

Fixed rate loans an attractive option for borrowers, says brokerage

Are homeowners ready for the mortgage cliff?


By Ryan Johnson

Fixed-rate mortgages are becoming increasingly attractive for homebuyers facing the “mortgage cliff” as the property market continues to grow, according to Sydney-based brokerage Home Loan Experts.

Despite the RBA taking the cash rate to 4.1% this month, Home Loan Experts CEO Alan Hemmings (pictured above left) advises customers to consider fixed rates due to persistent inflation and a strong property market driven by low stock levels and low vacancy rates.

“This is all to do with supply and demand,” Hemmings said. We have the lowest stock levels in 10 years. On top of this, vacancy rates across the country are generally sitting just above 1% (this was a big part of the inflation figure last month), and landlords are seeing an opportunity.”

While some of these factors could increase inflation and, in turn, the cash rate, Hemmings said the resulting impact made fixed rates even more appealing. 

“If there are three more increases and it takes longer to start seeing the cash rate reduce, the cheaper one-, two- and three-year fixed rates currently available will look an attractive option,” Hemmings said. 

Vivienne Than (pictured above second from left), a senior mortgage broker at Home Loan Experts, said that many of her clients had opted for a fixed rate for a number of reasons.

Than said one option for those clients whose fixed terms on 1.99% were about to end was to refinance to about 5.39% at three years fixed, which would be very close to the assessment rate their lender used when they applied for the loan. 

“Banks also increase their rates out of cycle to protect their profit margins and many fixed rates are more competitive than variable rates right now,” she said.  “History shows banks will not pass on the full rate cut to the consumer when the cash rate finally gets reduced.”

Will the market recovery continue?

Where there were once signs of decline in property prices and sales, the Home Loan Experts team agreed that the newfound strength in the market would continue.

Despite interest rate rises, Home Loan Experts had its highest level of submissions in a month in May and finalised more purchases than refinances throughout the financial year.

“In the last three months, we have consistently been doing 60% of our total business as purchases,” said the company’s broking manager, Bhisan Raj KC (pictured above second from right).

Raj said 40% of the brokerage’s business involved refinancing and this was heavily driven by rate hikes, cashbacks and the mortgage cliff that has loomed over the market.

“Recently, we have seen that most of the purchase deals are pre-approvals though,” Raj said. “This is in line with the lack of new listings and strong demand.”

Home Loan Experts senior mortgage broker Jonathan Preston (pictured above right) said that activity had picked up, and people were seeing the market move and did not want to miss out.

“ ‘We will wait until the market stabilises’ or ‘we will wait to see what happens with rates’ were formerly commonly heard phrases,” Preston said. “People are dramatically more eager than they were a few months ago. I think a lot of it is pent-up demand from people who were putting off doing things over the last 18 months.”

Than agreed, saying supply in the market was limited.  “Also, rate rises aren’t such a shock to the system any more, people are getting used to it,” she said.

Pressure to lower the buffer

One challenge to homebuyers rolling off interest low interest rates onto competitive fixed-rate options is the serviceability buffer.

Originally introduced to prevent over-leveraging, the buffer, evaluated at 3% above the market rate, now limits borrowing power and traps some homeowners in “mortgage prison”, meaning they are unable to refinance to a better rate.

APRA has warned against lenders lowering the buffer amid criticism from some in the industry that it should be lowered.

Preston emphasised the need to reduce the assessment rate buffer to enable competitive interest rates for these borrowers.

“Even for new buyers, it seems unlikely the cash rate will go up another 3% to over 7%, so it doesn't make sense to keep it so high,” Preston said.

Hemmings said clients facing difficulty must be proactive and talk to their broker or lender in order to not miss out on the current opportunities in the market.

“But don’t delay. It may be too late if the client is already in arrears before talking to someone,” Hemmings said. “Mortgage prisoners should firstly talk to their existing lender and see what they will do to assist. Also, speak to a broker who knows best what offers are available and where they can maximise borrowing capacity.”


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