I intend to have a YOLO Christmas before we fall over a fiscal cliff

I intend to have a YOLO Christmas before we fall over a fiscal cliff

An extraordinary number of Australians will suffer a severe “mortgage shock” in 2023 as they call in extremely low fixed-rate loans, often hedged at rates below 2% during the peak of the pandemic.

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From their ivory tower on Sydney’s Martin Place, the Reserve Bank’s tinkerers are watching closely how borrowers are reacting. According to the RBA’s latest Financial Stability Review, in the run-up to the pandemic, just one in five outstanding home purchase loans in Australia was fixed rate – the rest were variable rate loans. But during the pandemic, that rose to two out of five loans that were frozen as borrowers took advantage of unusually cheap fixed rates.

The risk for the RBA is that those of us who have committed act like we’re much more immune to the message the bank is trying to send, which is to stop spending and increase inflation .

We’re perhaps behaving more like our American cousins, about 90 percent of whom have 30-year fixed-rate loans — making them far more confident about the Federal Reserve’s aggressive hike-rate campaign.

However, unlike our American friends, Australian borrowers will soon be hit by a huge “fiscal cliff” when fixed maturities end. Around two-thirds of existing fixed-rate loans expire during 2023 (with a lucky third locked into 2024 or beyond).

Based on current market prices, for such borrowers (myself included) this will likely mean a rise in the average mortgage interest rate from 2 percent to around 5.5 to 6 percent. Ouch.

So should we be diligently saving hard and cutting our stuff to meet our future straitjacket paybacks? Some households with razor-thin savings cushions undoubtedly are, and should, either increase their voluntary repayments or adjust their spending habits ahead of time. But for me the answer is clear: not yet.

As an avid student of optimal decision making, I am all too aware of my budget constraint. Over time I’ve learned to make choices that maximize my happiness from given resources at any point in time. As my budget constraint changes, so do my choices. For now, though, I’m heading into the summer with my spending and vacation plans intact.

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If I’m the norm, that could mean a pretty sharp drop in household spending as fixed rates fall. However, I suspect I’m not, and many will be tightening their belts a bit this festive season, either by choice or out of necessity for those already impacted by rising prices and variable interest rates.

The larger your savings buffer, the better you can of course deal with fluctuating cash flows and smooth out your consumption. Reassuringly, the Reserve Bank has observed that a cohort of borrowers who have committed during the pandemic have higher incomes and larger buffers than those who have committed in the past.

So enjoy your summers with hot girls and hot boys, my friends – plague and extreme weather events permitting, of course. Even the tinkerers at the RBA are anticipating a mini-spending explosion this summer as we embrace our coveted freedoms. After all, we are only human.

Jessica Irvine is a senior business writer.

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