The fixed-rate cliff is a term used to describe the expiry of a significantly larger than average number of fixed-term loan facilities, which were secured between mid-2020 and mid-2022.
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This is because during the COVID-19 pandemic, many borrowers took out fixed-rate loans to lock in low interest rates. However, fixed-rate loans typically have terms of three years or less, so a large number of these loans are now expiring and borrowers are transitioning to much higher variable rates. _________________________________________________________________________________
For example, in Australia, it is estimated that around 880,000 fixed-rate loans expired in 2023, with a further 450,000 expiring in 2024. This is significantly higher than the average number of fixed-rate loans that expire each year. _________________________________________________________________________________
The risk associated with the fixed-rate cliff is that some borrowers may struggle to service their loans on the new, higher, variable rates. This is because variable rates have increased significantly in recent months, in response to rising inflation. _________________________________________________________________________________
For example, in Australia, the average variable rate for new owner-occupier borrowers is now around 5.66%. This is significantly higher than the average fixed rate that borrowers were paying in 2020 and 2021. _________________________________________________________________________________
As a result, some borrowers may need to reduce their spending, make additional repayments on their loans, or even refinance to a lower rate loan in order to avoid falling into arrears. _________________________________________________________________________________
If you are a borrower with a fixed-rate loan that is expiring soon, it is important to speak to your lender to discuss your options. You may be able to refinance to a lower rate loan, or negotiate a repayment plan that is affordable for you.