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The majority of fixed-rate loans with extremely low interest rates will be expiring in the coming weeks, and borrowers will transition to higher revert rates. However, the Australian Prudential Regulation Authority (APRA) has restated its position that a 3 percent buffer is still appropriate.

As we enter the month of June, we are witnessing the wave of fixed-rate term expiries. Over the last few months, billions of dollars worth of fixed-rate loans have reached the end of their super-low fixed-rate terms. These terms were set during the period when the cash rate was at its emergency low of 0.10 percent, between November 2020 and April 2022. Borrowers are now transitioning to rates that are more than double what they were paying before.

For instance, fixed-rate loans written in 2020-21 had an average interest rate of around 2 percent. However, the current lowest market rates for variable mortgages and fixed-term loans stand at 5.18 percent and 5.29 percent, respectively, according to Lendi Group.

In the upcoming months, hundreds of thousands of borrowers will find themselves facing higher repayments as the majority of fixed-rate loans expire.

So what does the fixed rate cliff industry landscape look like?

The Reserve Bank of Australia (RBA) estimates that approximately one-third of outstanding housing credit is tied to fixed-rate loans, with around $350 billion spread across 800,000 loans expiring this year. The majority of these fixed-rate loans will expire between June and September 2023.

Let's take a look at the big four banks in Australia and their home loan portfolios. The Commonwealth Bank of Australia (CBA) will see $54 billion of fixed-rate loans expire by December, accounting for approximately 11 percent of its $483 billion mortgage book. This follows the $42 billion that expired in the first half of the year. Consequently, around 17 percent of CBA's loans will transition to higher rates by December 2023, with an additional 17 percent after that.

Similarly, Westpac anticipates around $55 billion of fixed-rate mortgages expiring in the six months leading up to September 2023, with another $40 billion expiring in the six months ending in March 2024.

National Australia Bank (NAB) and ANZ have a smaller volume of fixed-rate loans expiring, but they are still experiencing significant outflows. For example, NAB has $30.5 billion expiring in the six months up to September, and an additional $25.7 billion expiring in the six months ending in March. In the first half of this year, approximately $25 billion of NAB's fixed-rate loans matured, with another $50 billion set to expire in the second half.

According to NAB's chief economist Alan Oster, around 88 percent of the bank's fixed-rate loans will expire over the next two years, with approximately half of the expiring fixed-rate loans experiencing an increase in repayments of over 50 percent upon conversion.

ANZ has already witnessed $45 billion of fixed-rate loans expiring in the year leading up to March 2023, with an additional $44 billion set to expire before the end of March 2024.

The challenges of serviceability

The challenge of meeting serviceability requirements looms for many of these borrowers. The serviceability buffers, which currently stand at 3 percent, have increased since many of these fixed-rate loans were issued. For instance, Westpac's serviceability assessment is based on the variable rate that the loan will revert to after the fixed period, plus a 3.0 percent buffer. With Westpac's current reference variable housing rate at 8.33 percent, borrowers would need to demonstrate their ability to afford repayments at a rate of 11.33 percent, which may prove difficult for many.

To address this issue, Westpac and several other lenders are revisiting their credit policies. Westpac has introduced a Streamlined Refinance model that reduces the buffer for eligible customers. This exception is made for customers who meet certain criteria and have a proven track record of servicing their existing loan commitments.

Despite calls to reduce the buffer, APRA has reaffirmed its decision to maintain it at 3 percent. APRA Chair John Lonsdale emphasized the importance of prudential lending and stated that the serviceability buffer level remains appropriate in the current economic environment. However, he acknowledged that banks have some flexibility in applying these buffers.

Lonsdale stated, "APRA expects banks to have prudent limits, controls, and justifications for exceptions to lending policy and for these loans to be closely monitored." He also cautioned against new, higher-risk lending and reiterated that APRA will continue to provide guidance and expectations in the future.

If you're one of these people facing the drop off from your low fixed rate to a high variable rate. Don't hesitate to connect with one of Sydney's top mortgage brokers at DeMarque Finance.

Original Article Credited to : The fixed-rate cliff arrives - The Adviser

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