Homebuyers are falling off the mortgage cliff. How hard will the landing be?
Remember when you could get two-year fixed term mortgages at 1.79%? If the same homebuyers were to refinance today, they would be looking at variable rates of around 5.75%.
That, in a nutshell, explains a mortgage cliff. As UNSW Business School 's Mark Humphery-Jenner, PhD CA explains on LinkedIn, this cliff is coming — $350 billion worth of mortgages will come off fixed rates in 2023.
That's 800,000 loans switching from the ultra-low fixed rates to very high variable rates.
So should you be worried? Not according to Humphery-Jenner who explains why banks will try to cushion the blow as much as possible.
He writes: "Banks hate fire sales. They often recover limited amounts, they are terrible PR, and they risk depressing the market and harming the rest of the loan book. Banks much prefer restructuring loans than forcing people to sell."
Other factors that will prop up the market include:
But the mortgage stress is real. According to this Roy Morgan poll, one in four mortgage holders are experiencing mortgage stress, which means they're spending between 25% and 45% of after-tax income on mortgage.
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But alcove founder Chris Bates writes the impact of this will be limited to highly leveraged buyers in certain pockets only.
Why? As a mortgage broker he has seen time and time again banks going to extreme lengths to support homeowners.
He writes on LinkedIn: "The banks will do what they need to do. The truth is that even if there is mortgage stress, the banks, similarly to payment holidays in COVID, will be able to go to lengths that surprise us all to keep property owners in their homes. APRA will allow them to do it.
"Both CBA and Westpac CEOs came out last week to confirm this. They will extend loan terms, create payment holidays, allow interest only, cut rates and do whatever it takes to buy the borrower time."
When it comes to preparing for the fall, financial educator Lacey Filipich is pragmatic. "We're not going to change the RBA's approach today ... Make your plan now and put it somewhere safe so you can pull it out if/when you need it."
Fintech specialist Luke Raven says to cushion the blow, use banking products to your advantage.
He writes: "Just like applying the brakes in a car, friction can be great in the right circumstances. You can use technology to help! Some banks offer 'locked' accounts or 'vaults' which can help prevent impulse-buys and curb your excess spending."
Do you think borrowers over-leveraged during the last property boom? How hard do you think the landing from the mortgage cliff will be? Share your thoughts in the comments below.
?? For more insights on finance, follow Mark Humphery-Jenner, PhD CA , Chris Bates , Lacey Filipich and Luke Raven .
?? This article was written and curated by Finance News Editor Misa Han . Want to contribute to finance conversations on LinkedIn? Get in touch.
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2 年This will help me Shettyfarmsdahanu.com pravinshetty.com [email protected] 047 4736 523
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2 年Times are tough for first home buyers. The boom was quick to fall off. The rise in interest rates will be a bane for those who are not adept to market fluctuations and suffer from a lack of emergency funds. The situation is unlikely to stabilize anytime soon. The only way out is to pull in gears and work on diversifying investment portfolios and invest in good home loan insurance options. LinkedIn News Australia
Rural Land Developer and Land Sales
2 年In my opinion that's rubbish , when so many homes fall into arrears the banks will repo in a timely manner to achieve the best price for their security . This in no way helps the morgagee as he is gone and the costs escalate rapidly and there is little left over to reimburse the previous owner - if they even do.
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2 年The narrative around this is largely nonsense. Unless you've bought recently, the chances are as a home owner your wealth has increased by 30% on the back of unsustainable house price rises. So even if people are on the mortgage cliff, selling will bring them a tax free capital gain. Then, should downward pressure be on house prices and they fall, they may actually profit from buying back in again with a larger deposit than what they originally had.