As mortgage rates continue to rise around the world, and will likely continue to rise well into 2023, there is much analysis about how different nations might end up faring in this challenging environment of higher interest rates and high inflation.
While different methods yield slightly different results depending on the approach taken, there are two results that are consistent regardless: Australia is one of the world’s worst-placed nations to cope with rising mortgage rates, and the United States is arguably that best.
At first glance, there are many similarities between Australia and the US, both of which are prosperous, developed nations. But when it comes to the approach they each take to mortgages, they’re literally on opposite ends of the spectrum.
In the US, the overwhelming majority of mortgages are fixed for 30 years, which ensures the same repayment to the lender year after year, decade after decade. While fixed shorter maturities like 10 or 15 years are also somewhat common, well over 90 percent of American mortgages are on some sort of long-term fixed basis.
The opposite was true in Australia, where around 85 to 90 per cent of mortgages are variable in nature and subject to rising interest rates.
There is a long list of reasons why Australia does not have long-term fixed-rate mortgages like the US, such as: B. a historically far less developed long-term capital market, at times far higher interest rates than with variable and significantly lower bank rates Profits from this type of loan.
This has long been an advantage of the way mortgages are handled in Australia, with Australians only seeing rate cut after rate cut from November 2010 to May 2022.
But as most mortgage holders can cope with rising adjustable rates, there is also a challenging new dimension that Australians have never had to grapple with in such large numbers – fixed rate mortgage holders are returning to much higher adjustable rates.
Fixed rate cliff
Back in April, the RBA reported that around 40 percent of mortgages had some form of fixed term, a big departure from the traditional 85 to 90 percent of adjustable rate mortgages.
This shift has helped protect more than 1.25 million households from this year’s rising interest rates. Currently, nearly a million households with mortgage loans will not have felt the impact of rising interest rates by early 2023, when Westpac’s loan book is representative of broader mortgage holders.
By the end of 2023, the proportion of fixed-rate mortgage owners who have not experienced any interest rate increases will have fallen to almost a third.
The phasing out of this unprecedented number of fixed rate loans has been dubbed by many as the “fixed mortgage cliff,” but whether or not it qualifies as a cliff is very much in the eye of the beholder.
If all of this sounds familiar, it’s similar to what was happening in the United States leading up to and during the global financial crisis. Borrowers were lured into the real estate market by low interest rates and rapid house price growth, only to find that they faced significantly higher repayments once these low fixed rate loans expired.
Australia’s lending standards are better than those in the US during this period, but that’s not really a high bar to break. Some borrowers could get a NINJA loan and still buy a home. NINJA was an acronym created for households that had no income, job, or wealth.
Individual households climbing the cliff?
At the all-time low of fixed rates for three-year terms or less in the middle of last year, the average rate on a fixed-term loan of that term was just 1.95 percent, according to the RBA. Between January and November 2021, the average fixed-rate loan with a maximum term of three years was subscribed at an interest rate of 1.95% to 2.1%.
According to statistics from financial platform and comparison site Canstar, the average supply of adjustable-rate mortgages was 5.18 percent at the end of October. Since then, interest rates were hiked 0.25 percent at the RBA Cup Day meeting and are widely expected to rise another 0.25 percent at the December meeting.
After that, the interest rate outlook becomes a lot more controversial and varied, with analyst and big bank estimates for the top rate ranging from 3.1 percent to 4.1 percent.
Australia vs The World
With the exception of our compatriots on the other side of the Tasman continent, who are staring at the barrel of a 4.25 percent interest rate, Australians are facing arguably the most difficult experience of rising interest rates in the world.
In April, only 2.41 percent of the average new loan was subscribed. Including the recent rate hike, the average floating rate is now more than 3 percent above this level in just seven months. Despite much larger increases in nominal interest rates in recent decades, such as rising to 17 per cent in 1990, Australians have already experienced, in relative terms, the largest single rate hike cycle in the country’s history.
The generally volatile nature of Australian mortgages and extreme levels of overall household debt have left households far more vulnerable to rising interest rates than most other nations. The phasing out of fixed rate mortgages adds another challenging dimension, as many households exiting fixed rates face 250 to 300 percent of their previous interest bill.
While 30-year fixed-rate mortgages have higher long-term interest rates and make US banks a fraction as profitable as those in Australia, many borrowers in times like these may have preferred the certainty of the same monthly payment for decades to come.
Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator
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