Homeowners and the mortgage cliff are not a good mix, with the cliff appearing in 2023 and expected to continue this year.

But what is the mortgage cliff and is it as frightening as it sounds - or is as some in the real estate industry believe, just over-dramatic hype?

Lending Loop looks at the details.

What is the mortgage cliff?

Unless you've lived in a cupboard since COVID, you'd know that the Reserve Bank of Australia (RBA) dropped the national cash rate to its lowest figure on record in November 2020 - and kept it there until May 2022.

While the RBA has kept the cash rate steady at 4.35% since November 2023, the pandemic's super-low rate produced a rush of eager - for good reason - homebuyers, of whom many snapped up the safety of a fixed-rate loan.

Unfortunately, such safety was always going to end.

Enter the mortgage cliff and concerns that fixed-rate homebuyers falling from the cliff would need to cope with the now much higher cash rate.

And, with most fixed-rate loans ending in three (or five years), the first pandemic homebuyers reached this cliff last year, with more to fall in 2024.

Mortgage cliff: industry words and concerns

Let's take a look at some fixed-rate data.

According to Australian Bureau of Statistics (ABS) data, 1.2 million new home loans were financed between January 2020 and October 2021.

In July and August 2021, when fixed rates plunged to record lows, such loans peaked at 46% before dropping to 35% in October.

NB: Historically only 15% of new homebuyers will take out a fixed-term loan.

The RBA's Financial Stability Review in October 2023 noted that around two-thirds, or 23%, of October's 35% fixed-rate loans would expire in 2023, meaning the end of super-cheap major mortgage payments.

As CoreLogic's head of research, Eliza Owen, noted in her August 2023 fixed-rate mortgage cliff update.

"Average fixed rates with terms of three years or less bottomed out at 1.95% in May 2021 for owner occupiers, while average variable rates for new owner occupier borrowers are now 5.66%."

However, while variable loan interest rates were certainly higher than those of the pandemic years, the worst of the cash rate rises were largely over in June 2023 - hopefully - with only one further increase announced since.

Ms Owen added that a lot also depends on long-term perspective with the RBA's August 2023 Statement on Monetary Policy highlighting that the expiry of fixed-rate terms peaked at just under 5.5% of outstanding credit - or home loans - in the June quarter.

Ms Owen added that according to official data, such as the Australian Prudential Regulation Authority (APRA), mortgage arrears - or late payments - are below pre-pandemic levels.

As well, after the 46% peak of fixed-rate loans in the market, this figure plunged sharply from early 2022 and beyond.

As of June 2023, fixed-rate loans made up just 8.2% of the market, based on ABS figures.

Mortgage cliff: terrifying or a no-show?

In her August 2023 report, Ms Owens cautiously gives the lie to the cliff's terrifying forecasts.

However, she warned there may be a "mild deterioration" in housing market conditions if new listing decisions continue to rise. 

"The good news for mortgage holders is that this period of economic slowdown will also take the RBA closer to its long-term inflation target, which could be the impetus for a reduction in the cash rate in the second half of 2024, as predicted by most major banks," Ms Owens said.

In a September 2023 article from The Sydney Morning Herald,- believed by some to be around the "halfway point" of the mortgage cliff - Federal Treasurer Dr Jim Chalmers acknowledged that it was still tough going for families experiencing cost-of-living strains with inflation remaining "higher, for longer, than we'd like."

Former RBA governor, Dr Phillip Lowe also suggested that the mortgage cliff had been easier than expected due to homeowner savings built up during the pandemic.

However, Savings.com.au believes the mortgage cliff is a no-show trend.

In April 2024, Savings noted according to RBA figures, less than 1% of home loans are in 90-day arrears - which is lower than pre-pandemic figures.

Yet the RBA also noted around 880,000 fixed-rate loans expired in 2023 with another 450,000 due to expire by the end of 2024.

Savings.com.au said one possible reason that mass mortgage defaults haven't occurred following such expirations is that lenders no longer consider fixed-rate borrowers as riskier than variable ones - which historically, they have done.

This is thanks purely to the high pick up of fixed-rate loans during the pandemic.

However, Savings ends by warning homeowners that the "gentler downhill gradient is not quite finished yet" with "the risk to household balance sheets now hang(ing) on the outlook for inflation and unemployment".