The Fixed-rate Mortgage Cliff: Will It Eventuate?

October 6th, 2023 - by Brad Gillespie

Millions of Australians are coming off fixed-rate home loans and facing the prospect of much higher mortgage payments.

But is it impacting our local property market?

We explore whether the “fixed-rate mortgage cliff” is a real phenomenon in Sydney’s inner city and inner west.

What is the fixed-rate mortgage cliff?

During the pandemic, the RBA took the official cash rate to an emergency setting of 0.1%. It also offered banks exceptionally favourable terms for borrowing money.

The banks often passed this onto mortgage holders through record-low interest rates on fixed-rate home loans. In fact, in May 2021, the average short-term fixed-rate home loan fell as low as 1.95%. Millions of Australians took advantage of this by fixing their home loan interest rate for between one and three years.

A year later, however, the RBA began raising the official cash rate, which now stands at 4.1%. As a result, the banks have also been quickly raising their mortgage interest rates. Interest rates were last raised in June 2023, but they’re still a hot topic, having risen so fast over such a short period of time.

This means that as people begin coming off their fixed-rate loans, they face the prospect of much higher interest payments. In fact, for someone with a $1 million home loan, the difference is likely to be several thousand dollars a month.

Some economists have suggested that this phenomenon means many borrowers will face the prospect of no longer being able to afford to keep their homes and will have to sell. At the same time, higher interest rates mean buyers, including first-home buyers who we see in large numbers in Sydney’s inner city and inner west, can now borrow less than they once could.

This, they suggested, could create a perfect storm that causes property prices to fall rapidly. But has it?

What have we seen so far when it comes to the mortgage cliff?

So far, there have been few signs of any mortgage cliff impacting our market. In fact, listings have remained at record lows, and Domain research shows distressed sales are actually down from late 2022, and continuing to trend lower.

Our experience is that those properties that have come to market due to rising interest rates are often investment properties rather than main residences. We believe that this is happening for a few reasons.

First, while interest rates have risen, unemployment remains low. Those who are starting to feel the pinch of increased mortgage costs tend to have cut back on other spending rather than sell their family home.

Second, with a rising population and few properties on the market, demand continues to outpace supply in our city’s property market. Sydney’s median property price has actually risen 8.8% since its January low, according to CoreLogic, so there are far more buyers in the market than sellers.

Third, the rental market is so strong right now that it’s often cheaper to stay put and pay the mortgage rather than sell up and rent.

How this is impacting Sydney’s inner city and inner west

As time goes on, it’s likely that we may see more properties come to market as a result of fixed-rate home loans ending. However, it’s also likely that a disproportionate number of these will be investment properties.

That means we expect to see this happen in the apartment market more than the market for family homes.

At the same time, however, growing rents and increased yields mean we’re also likely to see more first-home buyers and investors in the market too, continuing strong buyer demand.

Finally, we anticipate that population growth and lack of development will play a part too. Australia is set to take on 700,000 new residents between 2023 and 2024. A great many of these will choose to call Sydney home.

This should keep up the pressure on house prices and rents and help ease any impact of interest rate rises on property prices.

We also expect downsizers to continue playing a prominent role in our local market and note that many of these are mortgage-free and remain unaffected by interest rate rises.

Want more?

In short, rising interest rates could force some people to sell, but - unless there is an unforeseen economic event - we don’t expect it to be the cliff once forecast, especially here in Sydney’s inner city and inner west. Instead, it’s more likely to happen gradually, with low supply and strong demand cushioning prices.

If you’re looking to buy or sell in our area, contact my team today.