How have interest rate rises impacted the property market in our area and what is happening as mortgage holders come off fixed term rates, and we edge closer to the so-called “mortgage cliff”?
How have interest rate rises impacted the property market here in Sydney’s East? We take a look at whether we are heading for a mortgage cliff.
The impact of interest rate rises
During the height of the pandemic, the RBA progressively reduced the cash rate so that in November 2021, it reached the ‘emergency’ level of just 0.1%. It also offered banks loans on exceptionally favourable terms – and many choose to pass this on to borrowers in the form of ultra-low fixed mortgage rates.
In fact, at the end of 2021, most of the big four were offering one-to-three-year fixed-term loans of around, or even below, 2%.
Many borrowers took the opportunity to fix their rates; others saw it as the perfect opportunity to borrow money and finance a new home.
Since May 2022, however, the RBA has been aggressively hiking interest rates, taking the official cash rate to 4.1% in August 2023 – the fastest rise ever.
This has resulted in the average standard variable interest rate reaching 6.63%, while the average three-year fixed-rate loan now sits at 7.88%.
This affects how much people can borrow, but more importantly, how large their repayments will be.
What’s a mortgage cliff?
Many buyers who chose to lock in a fixed term for their mortgage at a low rate (home loan interest rates were as low as 1.95% in early 2021) are about to experience a very different reality.
Most fixed-rate loans are set to end over the second half of 2023 or early 2024. CoreLogic estimated this phenomenon could impact as many as 1.3 million home loans.
When that happens, the new variable rate will be applied to their mortgage. This could result in a real shock to the finances of many mortgage owners.
What impact will the fixed rate cliff have on mortgage owners?
How much this change to a higher interest rate impacts borrowers will depend on the size of their home loan.
Using examples relevant to our area, the median one-bedroom apartment price in Potts Point is currently $765,000. Someone who paid a 20% deposit to buy the average local apartment would need a mortgage of around $612,000.
For two-bedroom apartments, the median is $1,307,500, so funding 80% of the property’s value would require a mortgage of $1,046,000.
Assuming a 30-year principal and interest mortgage with no fees, the difference between interest rates of 2% and 6.5% would look like this:
|Apartment||Median||Mortgage Size||Monthly Repayments at 2% Interest Rate*||Monthly Repayments at 6.5% Interest Rate*||Monthly Increase in Repayments|
* Source: MoneySmart mortgage calculator. Assumes a 30-year principal and interest home loan paid monthly with no additional costs.
People most likely to be impacted are those who have the largest home loans (which is often those who have also bought most recently).
What could happen?
There’s speculation that with so many property owners facing significantly higher monthly repayments, they could be pushed towards mortgage stress, and we could see people unable to pay their mortgages or more distressed sales.
So far, however, this hasn’t happened. It’s business as usual, and we’re still seeing many buyers in our area and no significant distressed sales. We believe this is the result of several factors.
Firstly, property owners in our area tend to be finance-savvy. They’re often professionals working well-paid jobs. In fact, the last Census told us that the residents of Potts Point earn more than $400 a week above average wages at $2,041 per week. This should make it somewhat easier for many people to absorb an interest rate rise.
Secondly, not all mortgages were taken out in the last few years. In fact, with the average tenure or “hold time” of a NSW property being 9.7 years, you can assume many were taken out a long time ago and are no longer substantial.
Thirdly, cash buyers are over-represented in our area, especially given the large number of downsizers who call Potts Point and surrounds home.
Fourthly, CoreLogic argues that the majority of borrowers are (and were) already on variable rates and, therefore, “have already been exposed to the majority of cash rate rises”.
As a result, so far, we haven’t seen any major impact. In fact, APRA’s housing credit in arrears figure is extremely low at 1.2% of outstanding debt, which is below pre-pandemic levels.
If anything, we believe there is still room for price growth: especially given the lack of property listings on the market.
The future of interest rates
Those who have been around a while may not think an interest rate of 6.5% is particularly high – historically, they have been far higher. However, the interest rate hikes that have occurred over the last 15 months represent the fastest and most prolonged period of rate rises on record in Australia.
Many mortgage holders were relieved when the RBA left interest rates at 4.1% for the second month in a row in August.
With inflation seemingly coming under control and unemployment rising, some economists now believe these pauses are the precursor to rate cuts, with the RBA taking action by early 2024.
If you’re thinking of buying or selling in Sydney’s eastern suburbs, get in touch.