The Australian home borrowers who face a 65 per cent surge in their mortgage repayments in 2023

Hundreds of thousands of Australian mortgage holders face a 65% increase in their monthly payments as their fixed-rate loan term expires in 2023.

The era of the record low interest rate of 0.1 percent in 2021 saw borrowers take advantage of home loan rates of two percent or less.

But now, the Reserve Bank of Australia estimates that more than 800,000 temporary loans at those ultra-low interest rates will come due in 2023, and those mortgage holders will face a massive increase in repayments.

The Reserve Bank will meet on Tuesday to discuss its next interest rate move, and market consensus is for an additional 0.25 percent hike to be announced this week, putting the cash rate at 3. 35 percent.

As of May 2021, the big four banks (ANZ, Commonwealth, NAB and Westpac) were offering average fixed rates of 1.92%.

RateCity has warned borrowers who locked in their loan for two years at that rate that they will face a steep default variable rate of 7.18 percent three months from now.

That would mean a borrower with an average $600,000 mortgage faces an overnight increase of $1,645 in their monthly payments, with experts warning of “mortgage jail” as strict rules make refinancing more difficult. of the Australians.

Overburdened borrowers who failed to get a decent pay raise and those who took out a loan with less than 20 percent deposit are particularly at risk.

So are those who bought when home prices were at their peak and now owe potentially more than their property is worth, known as negative equity.

scroll down for audio

When borrowers signed up for ultra-low fixed rates in 2021, the fine print suggested that once their two-year fixed period expired, they would move to a default ‘reversal’ variable rate with a three in front of it.

However, that reversal rate was based on the cash rate remaining at 0.1 percent.

Since then, the Reserve Bank has raised the cash rate by three percentage points, with Westpac and ANZ forecasting that rate will hit 3.85 percent by May of this year.

This would move borrowers to a variable reversal rate that was 3.75 percentage points higher than its fine print suggested nearly two years ago.

If the RBA raises rates three more times, that reversal rate would sit at 7.18 percent for borrowers exiting a two-year fixed rate in May 2023, RateCity calculated.

A borrower with an average $600,000 mortgage would see their monthly payments rise sharply by 65 percent to $4,163, versus $2,518 with an existing fixed rate on a 25-year loan.

The average reversal rate with a Big Four bank would be 7.18 percent for loans up to $750,000.

This would drop slightly to 7.16 percent for larger mortgages because NAB offers slightly lower rates for larger loans.

A couple working on a $1 million mortgage would see their monthly payments increase from $4,197 per month to $6,930, which is an increase of $2,733.

RateCity’s director of research, Sally Tindall, said borrowers who did not earn better wages over the past two years would be particularly at risk.

“If they borrowed every possible dollar from the bank in 2021 and haven’t had a decent pay raise in that time, they may not meet the bank’s new serviceability test,” he told Daily Mail Australia.

‘Hopefully people are prepared and have been putting extra payments on their home loan while the sun was shining, but some people will be caught off guard.

“When the cliff hits some borrowers, they may realize too late that they won’t be able to climb this.”

Then there are borrowers who bought during the boom only to find big price drops, potentially leaving them owing the bank more than their home is worth and making it harder for them to refinance at a more competitive variable rate.

“Those who will find it difficult to refinance are people who recently bought, pushed themselves too hard to get into the real estate market, might have had a small deposit to start with, [and] they borrowed every dollar from the bank they could,’ said Ms Tindall.

Borrowers who had a mortgage deposit of less than 20 percent would also have a harder time getting a cheaper variable rate, since they also had to pay thousands in mortgage insurance to lenders.

“They have limited options, that’s for sure,” he said.

“If you find that, when you get out of your fixed rate, you still don’t own 20 percent of your mortgage, you may not be able to refinance. Or, if you refinance, you have to pay expensive mortgage insurance to lenders which can often really hinder your efforts to try to save money.

Lenders must assess the borrower’s ability to cope with a three percentage point increase in variable mortgage rates under Australian Prudential Regulation Authority rules that came into effect in November 2021.

Ms Tindall said the tougher lending rules would make it harder for an overburdened borrower coming off a fixed rate to get a better deal from a new bank.

“That three percent stress test is likely to mean that some people won’t be able to refinance,” he said.

“They may find they are in what we call foreclosure – they are stuck with their current lender.

‘If you renegotiate within your own bank, the bank is not subjecting you to those serviceability tests.

“If you refinance to a different bank or lender, they have to put you through that serviceability test — it was a test that was much easier to pass when rates were at record lows.”

Borrowers who have a 20 percent or more equity in their home are more likely to be able to negotiate and refinance to a lower variable rate or move to a new bank to take advantage of a lower introductory rate for new customers.

Instead of paying 7.18% interest in May 2023, they could negotiate a variable rate of 5.25%, which would be the lowest among big banks if rates went up three times as much.

A borrower with an average mortgage of $600,000 would be paying $3,510 a month instead of $4,163, a savings of $653.

A couple with a $1 million mortgage would be paying $5,850 a month instead of $6,930, a savings of $1,080.

“Lenders right now are very aware of the refinancing boom, not only as an opportunity to gain new customers, but also as a risk because they are losing customers to competitors,” said Ms. Tindall.

Refinancing between owner-occupiers and investors was close to a record $19.1 billion in December, new data from the Australian Bureau of Statistics shows.