Financial Stability Review – October 20235.2 Focus Topic: An Update on Fixed-rate Borrowers

Between March 2020 and January 2022, when interest rates were at their lowest, the share of fixed-rate housing credit almost doubled, nearing 40 per cent of housing credit outstanding (Graph 5.2.1). Since the first increase in the cash rate in May 2022, around 45 per cent of these loans (by value) have rolled off onto higher interest rates, with the vast majority of these borrowers opting for variable-rate loans.

Graph 5.2.1
Graph 5.2.1: Two-panel bar chart. The first panel shows the fixed-rate share of outstanding housing credit by residual maturity (less than or equal to one year, more than one year and less than equal to two years, and more than two years). The majority have a majority of less than one year but thes share has been declining in 2023. The second panel shows the profile of expiring fixed-rate loans by value, highlighting the share that has already expired.

This Focus Topic explores how borrowers who have already rolled off fixed rates have managed the transition and assesses the risks for the remaining fixed-rate borrowers. It finds that:

  • The vast majority of borrowers who have rolled off fixed rates have managed the transition to higher interest rates well. Arrears rates among this group have increased a little, in line with the increase observed among variable-rate borrowers.
  • The majority of current fixed-rate borrowers are estimated to have sufficient income to continue meeting their obligations after moving onto higher mortgage payments. The majority also have large savings buffers.[1]
  • Fixed-rate loans yet to roll off do not appear materially riskier than those that have already rolled off. This group contains a slightly larger share of higher risk borrowers; however, these borrowers have also benefited from low rates for longer.

The vast majority of fixed-rate borrowers who have rolled off to date have managed the transition well.

Arrears rates for borrowers who have recently rolled off fixed-rate loans have increased slightly from low levels and are generally similar to arrears rates among other variable-rate borrowers (Graph 5.2.2).[2]

Arrears rates for borrowers who have recently rolled off fixed rates are also similar to those of other variable-rate borrowers when considered by borrower risk characteristics. Borrowers who took out (or refinanced) loans at low rates could be expected to be riskier given the larger increase in interest rates they face compared with other borrowers. However, arrears rates have remained low for these borrowers to date (Graph 5.2.3).[3] By contrast, arrears rates tend to be higher for borrowers with high ratios of loan-to-value (LVR) or loan-to-income (LTI), and moderately higher for first home buyers.[4] As might be expected, arrears rates are lower for borrowers still on fixed rates irrespective of their risk characteristics.

Graph 5.2.2
Graph 5.2.2: Three-panel chart showing arrears rates by loan type (total, always variable, rolled-off or currently fixed). The first panel shows total loans, the middle panel shows rates for owner-occupiers (slightly higher than total) and the third panel shows rates for investors (lower than total).
Graph 5.2.3
Graph 5.2.3: Bar chart shows arrears rates by risk factor and loan type (always variable, rolled-off, currently fixed). The bars show that arrears rates are higher for borrowers with loan-to-value ratios above 80.

Arrears rates for borrowers who have transitioned from fixed to variable rates are higher for owner-occupiers than investors (Graph 5.2.2). This may be partly attributed to investors tending to have higher savings on average, and to the strong growth in rental incomes helping them to partially offset the increase in their borrowing costs. Investors are also more likely to sell an investment property before entering arrears compared with owner-occupiers, for whom selling their home can come with significant financial and personal costs.

Most remaining fixed-rate borrowers appear well placed to manage the transition to higher interest rates when their loans roll off.

This is supported by three factors:

  1. Fixed-rate loans yet to roll off do not appear materially riskier than those that have rolled off already. However, there is a somewhat higher share of risky characteristics among current fixed-rate borrowers than those whose loans have already rolled off. In part, this reflects that these loans are generally newer, so borrowers have had less time to repay their principal (i.e. reduce the size of the loan) and build up savings buffers (Graph 5.2.4). The majority of these loans can be expected to become less risky over time; however, in the meantime they will likely be more at risk if unemployment were to rise.
    Graph 5.2.4
    Graph 5.2.4: Two-panel bar chart of loan characteristics by loan type (always variable, rolled-off, currently fixed). The first panel shows the median loan age (highest for always variable). The second panel shows the share of loans with risk factors (high LVR, higher LTI, first home buyers and loans originated at low rates). The shares are highest among currently fixed-rate loans.
  2. Most fixed-rate borrowers are estimated to have sufficient incomes to meet their higher mortgage payments and necessary expenses. Current fixed-rate borrowers are expected to face slightly larger increases to their scheduled mortgage payments when their fixed-rates loans roll off compared with those whose loans have already rolled off. As at July 2023, around 10 per cent of fixed-rate borrowers who have rolled off their fixed rates since May 2022 have faced an increase in their payments of more than 60 per cent. By comparison, around 14 per cent of current fixed-rate borrowers are expected to face an increase in mortgage payments of more than 60 per cent when they roll off, based on variable rates as at July 2023. This in part reflects that a larger share of these loans were originated (or refinanced) at very low interest rates during the COVID-19 pandemic compared with fixed-rate loans that have already rolled off.

    Nevertheless, the vast majority of fixed-rate borrowers have sufficient income to service these higher loan payments and meet their essential expenses. Around 7 per cent of fixed-rate owner-occupier borrowers are estimated to have their required mortgage payments and essential spending rise to be above their incomes after rolling off their fixed rates, based on baseline living expenses from the Household Expenditure Measure (Graph 5.2.5; see also Chapter 2: Resilience of Australian Households and Businesses). This estimated share increases to around 18 per cent when using a broader measure of expenses.
    Graph 5.2.5
    Graph 5.2.5: Bar chart showing ranges of estimates of borrowers with cash flow deficit by rate type (always variable, rolled-off, currently fixed). The lower bound of the ranges are given by estimates using the baseline HEM estimate and the upper bound given by using the broader HEM estimate. The range is highest for borrowers on fixed rates.
  3. Most fixed-rate borrowers have substantial savings. Further supporting borrower resilience, fixed-rate owner-occupier borrowers have benefited from lower interest rates during their fixed-rate period and accumulated material savings buffers over that time (and in some cases, added to their existing savings).[5] Around two-thirds of these borrowers have liquid savings equivalent to at least 12 months of scheduled mortgage payments. This is comparable to the savings of variable-rate owner-occupier borrowers (Graph 5.2.6). However, there is also a smaller share of fixed-rate borrowers (less than 20 per cent) who will roll off onto higher interest rates with much lower savings buffers, equivalent to less than three months of scheduled mortgage payments.
    Graph 5.2.6
    Graph 5.2.6: Bar chart showing liquid assets of mortgage holders by rate type (fully variable, split, fully fixed). The x-axis is divided into three buckets of months of scheduled loan payments (less than three, three to twelve, and more than twelve months). Most borrowers have liquid assets quivalent to more than twelve months of loan payments.


See Lovicu G-P, J Lim, A Faferko, A Gao, A Suthakar and D Twohig (2023), ‘Fixed-rate Housing Loans: Monetary Policy Transmission and Financial Stability Risks’, RBA Bulletin, March. [1]

Earlier-stage arrears are also similar for borrowers who have rolled off fixed-rate loans and variable-rate borrowers. The level is higher for the share of rolled-off loans that are 30 days or more in arrears, at around 1.2 per cent, but liaison with lenders suggests that some of this reflects borrowers needing to update their payments rather than borrowers experiencing servicing difficulties. [2]

This is consistent with the analysis in 5.3 Focus Topic: Indicators of Household Financial Stress, which finds that a similar share of these borrowers have estimated costs of living in excess of income and similar savings buffers as other borrowers. [3]

For discussion of these risk factors, see 5.3 Focus Topic: Indicators of Household Financial Stress. [4]

Some borrowers were on variable-rate loans previously and already had large savings before fixing their rate. Fixed-rate borrowers are limited in their ability to save in offset and redraw accounts associated with their mortgages and therefore hold their savings largely outside of such accounts. While around one-fifth of recently rolled-off borrowers move over significant savings once they regain access to redraw and offset accounts associated with their new variable-rate loans, most keep their savings in their existing structures. This could reflect inertia or potential transaction costs (e.g. when selling shares). As a result, their saving buffers as measured by savings in their offset and redraw accounts (visible in the Securitisation System data) appear significantly lower on average than those of comparable variable-rate borrowers even a few months after roll-off. We are instead able to monitor their other forms of savings via private survey data as shown in Graph 5.2.6. [5]