There has been a lot of talk this year about the looming disaster presented by the mortgage cliff.
The mortgage cliff refers to the sudden large increase in repayments mortgage holders on fixed rate loans will face when their term ends and their loans revert to variable, and the subsequent effect it will have on the property market.
But we’re well into 2023 and have not seen the apocalypse we were told was coming.
Perth’s median house price has increased over the past year and properties are selling quickly, suggesting demand is strong and people have the capacity to purchase homes.
And while there have been constant predictions of a flood of forced sales, REIWA data does not yet show an increase in properties advertised as mortgagee sales or mortgagee in possession.
There is no denying 12 interest rate increases have had an impact on WA households, but it is disingenuous to underestimate a home owner’s capacity and willingness to adjust their spending habits.
Dinners out, takeaway, new cars, holidays and designer clothes quickly give way to making do with what you have. This leads to a reduction in spending, which then takes the heat out of the economy and is in keeping with what the Reserve Bank of Australia wants to achieve so they can halt the rate rising cycle.
And while changing from a fixed rate of around 2 per cent to a variable rate of 6 per cent or more will be a financial shock, households already on variable interest rates have adjusted to this change over the past 14 months, albeit more gradually.
Many home owners on fixed rate loans have prepared for the dreaded mortgage cliff. They have paid extra onto their mortgage so they are in front with their repayments, created a savings buffer or refinanced.
In addition, banks are working with their clients to help prevent hardship, using measures like extending the loan term to reduce payments or reverting to interest only repayments over the short term.
The mortgage cliff does represent a challenge for many, but home owners shouldn’t panic. Make the changes you have to and speak to your bank if you think you will face difficulty.
Remember, this won’t last forever. WA’s economy is strong and unemployment is low. We are in a much better position than other states; we have lower than average mortgages, higher than average wages and relatively affordable housing. Overall, the signs are positive.
And although things may be difficult at the moment, my advice is: never miss an opportunity to work on your balance sheet with additional repayments of any size, as wars are won and lost on increments.
Sourced from REIWA