The ‘fixed-rate cliff’ has emerged as a potential risk to housing market values in 2023. The RBA October Financial Stability Review noted that about 35% of outstanding housing credit was on fixed terms, with two thirds of this expiring in 2023. This means that around 23% of all outstanding mortgage debt will be re-priced over the course of the year, and re-priced at a much higher rate.

But how worried should we be about the expiry of fixed-rate terms? The extent of risk is not really known, but here’s five things to know about the looming expiries to give some perspective.

Figure 1. Monthly average new lending rates

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Source: RBA

1.     The pain will be felt acutely from April 2023

Figure 2 shows the initial repricing from an average two-year fixed term rate during the pandemic, to a variable rate. April 2023 may be particularly painful for those who locked two years ago, with a much higher reversion rate and a surge in the average loan size in April 2021.

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2.       Variable borrowing has a lot to teach us

Most outstanding mortgage debt is on variable rate terms, yet housing market measures show resilience in mortgaged households amid rising rates. New listings remain lower than usual, and borrowers are still making payments to offset and redraw accounts (though these are declining).

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Will fixed-rate borrowers be as resilient when they hit higher rates? The RBA has noted that the current cohort of fixed-rate borrowers have a similar income to variable rate holders, so they should be able to save in a comparable way. There are still risks however, including ongoing rate rises, and a small amount of borrowers having virtually no pre-payment buffers.

3.     Variable rates are rising, but they can also come back down

With so much mortgage debt on variable terms, and more to join the variable-rate cohort, borrowers can at least look forward to taking advantage of declining rates sooner when the cash rate passes a peak.

Some economists have highlighted that the RBA may need to start reducing rates by the fourth quarter of this year. This means while increased variable rates could create tough conditions in the short term, the steep hike in interest repayments will not be for the entire life of the loan.

4.     Equity remains high in most markets

Large value gains in the past few years mean that a relatively small cohort of borrowers may actually fail to pay off their debt if they have to sell. RBA assistant governor Brad Jones recently noted that around 0.5% of home loans were in negative equity amid current price falls. CoreLogic estimates only 2.9% of suburbs across the country have seen home values fall more than 20% from a recent peak.  

5.     It will take a while to see an impact

Official data on ‘non-performing’ loans is produced by the banking regulator APRA on a quarterly basis. The latest available data is to September, and showed only 1.0% of home loans were at least 30 days past due. 

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The impact of rising rates on households will also vary by savings, income, and some other personal circumstances. We may also be underestimating the possible responses that will come through from the banking sector as fixed-rate borrower terms expire.

Australians with fixed-rate loans are about to see a painful adjustment. This is partly the intention of rising rates, as households have to curb spending in response to higher interest costs. So far, listings data and arrears data suggest there is minimal impact on the housing market from defaults. However, the true test of the market will be over the next ten months.