The fixed-rate cliff arrives

Over the past few months, billions of dollars of fixed-rate loans have been rolling off their super-low fixed-rate terms — set when the cash rate was at its emergency low of 0.10 per cent (between November 2020 and April 2022 ) — and these borrowers have been reverting onto rates that are more than double what they were paying previously.

For example, fixed-rate loans written in 2020–21 typically were around 2 per cent, but the lowest market rates are now sitting at 5.18 per cent for variable mortgages and 5.29 per cent for fixed-term loans (according to Lendi Group).

Hundreds of thousands of borrowers may soon find themselves chafing at their new repayments, as the vast majority of fixed-rate loans expire from this month onwards.

What does the fixed-rate cliff look like?

According to the Reserve Bank of Australia (RBA), around one-third of the outstanding housing credit is for fixed-rate loans and approximately half of that — estimated to be around $350 billion over 800,000 loans — is rolling off this year.

The vast majority of fixed-rate loans will expire between June to September 2023.

Take the Australian home loan portfolios of the big four banks, for example.

The Commonwealth Bank of Australia (CBA) will see $54 billion of fixed-rate loans expire between now and December — representing about 11 per cent of its $483 billion mortgage book. This followed on from the $42 billion that expired in the first six months of the year.

As such, approximately 17 per cent of its $483 billion loans will roll off onto higher rates by December 2023, with a further 17 per cent after December 2023.

Similarly, Westpac estimates that about $55 billion of fixed-rate mortgages are coming off in the six months to September 2023, with a further $40 billion coming off in the six months to March 2024.

National Australia Bank (NAB) and ANZ both have a smaller volume of fixed rates coming off but are still at the peak of the outflow.

For example, NAB has $30.5 billion rolling off in the six months to September, with another $25.7 billion coming off the six months to March. In fact, about $25 billion of NAB’s fixed-rate loans matured in the first half of this year, but another $50 billion is due to expire in this next half.

Speaking on a NAB Commercial Broker Economic Update in March, NAB’s chief economist Alan Oster said the peak will occur this month (June) and around 88 per cent of NAB’s fixed-rate loans will expire over the next two years.

Moreover, around half of the fixed-rate book expiring by March 2024 will experience an increase in repayments of over 50 per cent at conversion, the bank has said.

ANZ has already seen $45 billion of fixed-rate loans expire in the year to March 2023 and a further $44 billion will expire before the end of March 2024.

The serviceability challenge

Many of these borrowers may find themselves becoming ‘mortgage prisoners’ — unable to pass the serviceability buffers, which are now higher (at 3 per cent) than they were when many of these fixed-rate loans were written (when it was at 2.5 per cent).

Take Westpac’s serviceability assessment, as an example. Fixed-rate loans are assessed on the variable rate to which the loan will revert after the fixed period, plus a 3.0 per cent buffer. Westpac’s reference variable housing rate is currently 8.33 per cent — meaning borrowers would need to demonstrate that they can afford repayments at a rate of 11.33 per cent. This would likely be too high a hurdle for most borrowers.

As such, Westpac and several other lenders have begun looking at their credit policies to determine what can be done. Westpac, for example, is mindful that borrowers may not be able to pass the 3 per cent buffer and has introduced a Streamlined Refinance model that drops the buffer for eligible customers.

This exception will be made for customers who meet eligibility criteria and have a proven track record of servicing their existing loan commitments.

But despite growing calls for the buffer to be reduced, the Australian Prudential Regulation Authority (APRA) has once again reaffirmed its decision to hold the buffer at 3 per cent.

Speaking to the Senate economics legislation committee on Wednesday (31 May), APRA chair John Lonsdale said: “APRA’s serviceability buffer — currently set at 3 per cent — is important so lending remains prudent. We continually appraise these settings in response to changes in economic conditions. APRA’s assessment is that the serviceability buffer level remains appropriate in the current environment.

“We are attuned to concerns for some borrowers who may have fewer options for refinancing their existing loan with another lender, for what could be a variety of reasons. For some, the impact of rising interest rates may have resulted in less favourable serviceability results; others might be impacted by declining housing prices or changed personal finances.”

However, Mr Lonsdale added that banks do have flexibility on these buffers.

He told the committee: “Where sound borrowers do not fit standard lending criteria, APRA’s framework does not prohibit banks from lending to these borrowers.

“APRA expects banks to have prudent limits, controls and justifications for exceptions to lending policy and for these loans to be monitored closely.”

However, he warned: “It is important that exceptions are used prudently and do not result in new, higher risk lending. We will continue to reiterate our guidance and expectations in the coming period.”

[Related: AFG to enable brokers to recommend loans with 1% buffer]