Fixed rate mortgage cliff hasn’t hurt borrowers yet

With the fixed rate mortgage cliff already underway, there’s still no sign of distressed sellers or a blowout in arrears, according to an expert.

CoreLogic Head of Research Eliza Owen said that despite an estimated 1.3 million home loans moving from low fixed rates to high variable rates, borrowers are staying on top of their mortgages and there hasn’t been a major impact on property prices.

She said the latest data on housing credit, shows the number of borrowers late repaying their mortgages is still extremely low, at 1.2 per cent of outstanding debt. 

“Non-performing credit, which is late payments of 90 days or more, made up 0.7 per cent of all mortgages in the March quarter of this year, while payments just starting to be late – between 30 and 89 days – were even less at 0.5 per cent,” Ms Owen said. 

“Although total housing repayments in arrears has increased from a recent low of 1 per cent in the September quarter of 2022, but remained below pre-pandemic levels at 1.6 per cent in the March quarter.”

She said that late payments don’t always reflect mortgage stress because there is a lag and typically, distressed borrowers will often prioritise housing payments.

According to Ms Owen, the Reserve Bank of Australia has also reported extra payments into offset and redraw facilities – which were trending ever higher during Covid – are now easing, as more money for housing costs is diverted to interest payments. 

Ms Owen said the other factor that suggests borrowers still aren’t feeling the pain of the fixed rate reset, was that listings remained at low levels.

New listings did increase 2.8 per cent, or by around 912 listings, through July, which was unusual, as new listings have historically trended lower through July, amid a seasonal winter slowdown.

Ms Owen said the rise in new listings could be partially attributed to more motivated selling if homeowners are struggling to keep up with rising mortgage repayments.

“It could even be indicative of some homeowners selling based on foreseen issues with mortgage serviceability, with a sizable number of expiring fixed-term facilities toward the end of this year,” she said.

“New listings activity has often been led by a rise in home values and better selling conditions, with every one per cent increase in home values annually translating to an average uplift of half a per cent in new listings. 

“With home values rising for the past five months, this may be prompting more selling decisions that did not take place when the market was in decline last spring.”

She said some prospective sellers may also be looking to get ahead of the spring selling season when competition among vendors is likely to be more intense.

“The addition of new listings to the market are not necessarily a sign that higher mortgage costs are creating forced selling conditions,” she said.

“However, as more mortgage holders are exposed to higher interest costs, it will be a telling metric to follow.”

She said that the recent uptick in home values was one reason why sellers might be getting more confident now.

“After what is likely to be the last of the RBA’s rate hikes is passed through to households with a mortgage, there may be a mild deterioration in housing market conditions if new listings decisions continue to rise,” she said.

“The good news for mortgage holders is that this period of economic slowdown will also take the RBA closer to its long term inflation target, which could be the impetus for a reduction in the cash rate in the second half of 2024, as predicted by most major banks.”

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