The unwinding of low fixed rate home loans from major banks, made available through the Reserve Bank’s (RBA) Term Funding Facility (TFF), is expected to result in the refinancing of hundreds of billions of dollars of mortgages in the course of the next few years.
Australian banks accessed a total of $188 billion in funding from the TFF before it closed to further levies in March last year. The facility provides low cost funding over three years and will continue to support low borrowing costs until mid-2024.
The RBA estimated that the TFF, alongside other aid provided during the COVID-19 pandemic, resulted in a rate cut of 100 to 115 basis points.
As such, according to Andrew Walker, CEO and Founder of Nano Digital Home Loans, Australia is “sitting on the edge of the fixed rate rollover cliff”.
He noted that the Commonwealth Bank (CBA) had previously reported that $53 billion in fixed rate mortgages are expected to switch to variable rates in the second half of 2023 alone.
“Assuming the other major banks mirror the same structure as the CBA, we could expect to see $400 billion of fixed rate mortgages move to a variable interest rate over the next two years,” he said. Mr. Walker.
“If market expectations for rate hikes are correct, these will be significantly higher, resulting in a large increase in refunds. We anticipate that these customers will be hungry for better and fairer rates and will turn to new digital players such as Nano to refinance.
With interest rates now expected to start rising, mortgage holders have also sought to lock in current low rates with a total refinancing of $14.28 billion per month according to data from the Australian Bureau of Statistics (ABS ), up 18.7% over the year.
Mr Walker said Australians had the choice of switching home loan providers or potentially paying a “loyalty tax” by staying with their existing lender.
With a series of rate hikes expected in the coming months, mortgage holders would now face thousands of dollars in additional repayment charges per year.
Based on a $500,000 loan with a 25-year term and a variable interest rate of 2.7%, Savvy found that a 1 percentage point rate hike would trigger repayments monthly payments increasing from $2,294 to $2,557, or an additional $3,156 over the course of a year.
This could add to the 584,000 mortgage holders who were already considered at risk of mortgage stress in a Roy Morgan survey late last year.