As the world was rocked by the pandemic, many Australians turned to fixed-rate housing loans to lock in low-interest rates. These loans became increasingly popular, peaking at nearly 40% of outstanding housing credit in early 2022, twice their share from before 2020. Lenders competed fiercely for borrowers, offering fixed rates below variable rates, thanks in part to the Reserve Bank of Australia’s (RBA) monetary policy response to the pandemic. According to a recent report from the RBA, this policy had significant implications for the housing market and financial stability risks. You can read more about this in the RBA’s bulletin on fixed-rate housing loans, monetary policy transmission, and financial stability risks.

Fixed-Rate Loans: From Boom to Bust

The RBA’s decision to cut the official cash rate to a record low of 0.1% in November 2020 helped to reduce borrowing costs and boost demand for fixed-rate loans. But as the economy began to recover, the market shifted. Fixed rates rose relative to variable rates, and by mid-2022, new fixed-rate lending had dropped to just 5% of total new lending.

Payment Hikes Looming: The Challenge of Expiring Fixed-Rate Terms

Now, many of those who took out fixed-rate loans during the pandemic are facing a new challenge: their fixed-rate terms are expiring, and scheduled loan payments are set to increase.

For borrowers with expiring fixed-rate loans, the increase in repayments will depend on the loan’s current fixed rate, the timing of the expiry, and the loan’s new interest rate. Some loans will see scheduled payments increase by up to 50% at expiry, though the majority will experience an increase of 30% or less.

These changes could have a significant impact on borrowers, especially those who have not yet rolled off their fixed rates. While many borrowers have already reduced their variable rates by negotiating with their lender or refinancing, those who haven’t may face a larger initial increase in their scheduled payments.

Future Interest Rates and the Australian Housing Market

With more than a million fixed-rate loans set to expire by the end of 2023, it’s important for borrowers to be aware of these changes and to plan accordingly. The RBA’s future decisions on interest rates could also impact the affordability of housing loans and the overall housing market in Australia.

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