$52 Billion In Mortgages Will Need To Be Refinanced At Much Higher Rates

Over the past 12 months we have repeatedly been told about the looming mortgage cliff in Australia.

It has been spoken about continuously since interest rates began to rise early last year.

Last week, Australia's largest lender announced that we are now entering a period whereby $52 Billion in mortgages will need to be refinanced at much higher rates between now and December 31st.

The cruel fact about the Commonwealth Bank's findings is that these mortgage holders were told that rates would not rise until 2024 at the earliest when taking out these loans.

The disconnect between what was forecast and what has occurred is likely to have severe ramifications for many homeowners as we move through the back end of the year. 

An article released last week by News Corporation discusses the CBA findings. The full article with the headline " Australia's largest lender says fixed rate rollover peak has arrived" is our feature article this week as well as Core Logic's National Housing market update for August.

As you will see below, the Core Logic update includes a slide and commentary that shows the Gold Coast is currently the number one region in Australia for property price growth over the last three months.

Please see below:

Australia's largest lender says fixed rate rollover peak has arrived

Rising interest rates have helped steer the Commonwealth Bank to a record full year profit, even as increased competition squeezes margins and mortgage arrears rise.

Australia's largest mortgage lender on Wednesday posted a full year cash profit of $10.2 billion, up 5% compared to the previous financial year.

Earnings were boosted by a 0.17 percentage point rise in net interest margins year-on-year, which measures the difference between the interest CBA earns from lending money to borrowers, and the interest is pays to depositors.

Over the hiking cycle, lenders have been quick to pass on each rate hike in full to borrowers, while savings rates have generally lagged behind.

But CBA says margins have already peaked, and will continue to come under further pressure in the year ahead as lenders compete for business.

"Next financial year we expect competition, customer deposit switching and higher wholesale funding costs to remain margin headwinds, partly offset by the benefit of higher average cash rates," CBA said in its results release.

A key focus for the bank will be on retaining existing customers, CBA chief executive Matt Comyn said in an analyst briefing, particularly those reaching the end of their fixed loan term.

According to CBA estimates, the bulk of fixed rate mortgages will roll over between June and December 2023.

Many of these will be borrowers who locked in ultra low sub-2% fixed mortgage rates during the pandemic, who will reset at a much higher rate.

Mr Comyn noted “signs of downside risks building" as higher interest rates catch up to borrowers and other cost of living pressures become a financial strain for more Australians.

“Borrowers have only felt about two thirds of the current cash rate increases given that repayments don’t increase immediately and due to fixed rate loans, many of which expire in the next six months," Mr Comyn said.

Mr Comyn said while loan arrears have increased in recent months, they remain at historically low levels.

Fixed rate rollover causing refinancing avalanche

Higher interest rates are prompting more Australians to shop around for a better home loan deal, with Australian Bureau of Statistics data showing refinancing activity remains near-record highs.

In June, $20.2 billion worth of home loans were refinanced between lenders, up 12.6% compared to a year earlier, and only slightly lower than the all-time high of $20.8 billion in May 2023.

Mortgage Choice broker James Algar says banks are working harder to attract new borrowers in a slowing mortgage market.

"At the moment, the majority of our business is refinancing and most of that is coming from people who were on fixed-rate loans and are moving to variable loans," Mr Algar said.

“Borrowers are checking if their rate is competitive and where it is not, they are going elsewhere.”

Higher costs cause many to postpone life decisions

Even as borrowers reset to a much higher interest rate, Mr Algar says so far, most are coping, or finding new ways to make ends meet.

"I don’t think that there is as much mortgage stress as many analysts had anticipated, but I think there will be more to come and more people will struggle to make ends meet," he said.

"But rather than forced selling, people are taking the decision to go back to work and get a second job or work more hours."  

It comes as a new survey commissioned by Mortgage Choice found Australians are changing their spending and investment patterns in response to higher interest rates.

The survey found 76% of mortgage holders and 78% of prospective buyers have postponed a big life decision due to the current economic climate.

The most common life decision postponed was saving money, followed by purchasing a car, new home or investment property. Others put on hold plans to start a family, while almost one in five respondents aged over 55 have delayed retirement plans.

Mortgage Choice chief executive Anthony Waldron said twelve interest rate increases since May 2022 and the rising cost of living have put pressure on people’s hip pockets.

"These findings are worrying, but unfortunately not surprising," Mr Waldron said.

“We know that Australians' borrowing power has reduced by as much as 30% since the RBA first started raising the cash rate in May 2022."

Many economists expect interest rates have reached the peak, although cuts are not projected until 2024.

Please see below Core Logics National Housing Market Update for August 2023.

https://www.youtube.com/watch?v=WC7jEzSf2_Y

Please see below Core Logics top 10 and bottom 10 Regions for price growth over the past quarter