The Australian home borrowers who face a 65 per cent surge in their mortgage repayments in 2023

Hundreds of thousands Australian mortgage holders are facing a 65 per cent surge in their monthly repayments as their fixed-rate loan period expires in 2023.

The era of the record-low 0.1 per cent interest rate in 2021 saw borrowers take advantage of home loan rates of two per cent or lower.

But now the Reserve Bank of Australia estimates that more than 800,000 loans temporarily fixed with those ultra-low interest rates will be expire in 2023, and those mortgage holders will face a massive increase in repayments.

The Reserve Bank will meet on Tuesday to discuss its next move on interest rates, with the market consensus being a further 0.25 per cent increase to be announced this week, putting the cash rate at 3.35 per cent.

Back in May 2021, the Big Four banks – ANZ, Commonwealth, NAB and Westpac – were offering average fixed rates of 1.92 per cent. 

RateCity has warned borrowers who fixed their loan for two years at that rate face abruptly moving to a 7.18 per cent default variable rate in three months’ time.

That would mean a borrower with an average $600,000 mortgage faces an overnight $1,645 surge in their monthly repayments, with an expert warning of a ‘mortgage prison’ as strict rules make it harder for Aussies to refinance.   

Overstretched borrowers who had failed to secure a decent pay rise and those who took out a loan with a deposit of less than 20 per cent are particularly at risk.

So are those who bought when home prices were peaking to potentially find themselves now owing more than their property is worth – known as negative equity. 

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When borrowers took out ultra-low fixed rates in 2021, the fine print suggested that once their two-year fixed period expired they would move on to a default ‘revert’ variable rate with a three in front of it.

However, that revert rate was based on the cash rate remaining at 0.1 per cent.

Since then, the Reserve Bank has raised the cash rate by three percentage points, with Westpac and ANZ forecasting that rate to reach 3.85 per cent by May this year.

This would see borrowers move on to a revert variable rate that was 3.75 percentage points higher than what their fine print suggested almost two years ago.  

Should the RBA raise rates three more times, that revert rate would stand at 7.18 per cent for borrowers coming off a two-year fixed rate in May 2023, RateCity calculated.

RateCity has warned borrowers who fixed their loan for two years in May 2021, at just 1.92 per cent, faced abruptly moving on to a 7.18 per cent variable rate in three months’ time unless they started planning now

A borrower with an average $600,000 mortgage would see their monthly repayments abruptly surge by 65 per cent to $4,163, up from $2,518 under an existing fixed rate on a 25-year loan.

The average revert rate with a Big Four bank would be 7.18 per cent for loans up to $750,000.

This would fall slightly to 7.16 per cent for bigger mortgages because NAB offers slightly lower rates for larger loans. 

A working couple with a $1million mortgage would see their monthly repayments surge from $4,197 a month to $6,930 – marking a $2,733 increase.

RateCity research director Sally Tindall said those borrowers who hadn’t scored better pay during the past two years would be particularly at risk.

‘If they borrowed every last possible dollar from the bank back in 2021, and they haven’t had a decent pay rise in that time, they might not meet the bank’s new serviceability test,’ she told Daily Mail Australia.

‘Hopefully, people are prepared and they’ve been putting extra repayments into their home loan while the sun has been shining, but some people will be caught off guard.

‘When the cliff hits some borrowers, they may realise all too late that they’re not going to be able to scale this.’ 

Then there are borrowers who bought during the boom only to encounter big price falls, leaving them potentially owing the bank more than their home is worth and making it harder for them to refinance to a more competitive variable rate.

‘The ones that will find it difficult to refinance are people who bought recently, overstretched themselves to get into the property market, might have had a small deposit to start with, [and] borrowed every last dollar from the bank that they possibly could,’ Ms Tindall said.

Borrowers who had a mortgage deposit of less than 20 per cent would also have a harder time securing a cheaper variable rate as they also had to pay thousands in lenders mortgage insurance. 

‘They’ve got limited options, that’s for certain,’ she said. 

When borrowers took out ultra-low fixed rates in 2021, the fine print suggested that once their two-year deal expired, they would move on to a default ‘revert’ variable rate with a three in front of it but eight rate rises mean that default rate would be much higher (pictured is a Melbourne auction)

‘If you find that, when you come off your fixed rate, you still don’t own 20 per cent of your mortgage, you might find you can’t refinance. Or, if you do refinance, you have to pay costly lenders mortgage insurance that can often really hamper your efforts in trying to save money.’

Lenders are required to assess a borrower’s ability to cope with a three percentage point increase in variable mortgage rates under Australian Prudential Regulation Authority rules that came into effect in November 2021.

Ms Tindall said stricter lending rules would make it harder for an overstretched borrower coming off a fixed rate to get a better deal from a new bank. 

‘That three per cent stress test is likely to mean that some people won’t be able to refinance,’ she said. 

‘They might find that they’re in what we call mortgage prison – they’re stuck with their current lender.

‘If you renegotiate within your own bank, the bank is not putting your through those serviceability tests.

‘If you refinance to a different bank, or lender, they have to put you through those serviceability test – it was a test that was much easier to clear when rates were at record lows.’

Borrowers who have a 20 per cent stake, or more, in their home have a better chance of being able to negotiate and refinance a lower variable rate or move to a new bank to take advantage of a lower introductory rate for new customers. 

Instead of paying 7.18 per cent interest in May 2023, they could instead negotiate a 5.25 per cent variable rate, which would be the lowest among the big banks should rates rise three more times.

A borrower with an average $600,000 mortgage would instead be paying $3,510 a month instead of $4,163 – a saving of $653.

A couple with a $1million mortgage would instead be paying $5,850 a month instead of $6,930 – a saving of $1,080.

‘Lenders at the moment are acutely aware of the refinancing boom – not just as an opportunity to win new customers – but also as a risk because they’re losing customers to competitors,’ Ms Tindall said.

Refinancing among both owner-occupiers and investors was close to a record high of $19.1billion in December, new Australian Bureau of Statistics data shows.