Written by: Shore Financial
Australia is typically a nation of variable-rate borrowers with fixed lending usually making up around 10-15% of the total mortgage market, according to AMP Capital. But in November 2020, after the Reserve Bank of Australia slashed the cash rate to a historic low of 0.10%, the popularity of fixed-rate mortgages soared, with around 40% of borrowers locking in an ultra-low rate during 2021.
All good things must come to an end, though – with the RBA lifting the cash rate eight times since May 2022 as it tries to get inflation under control.
With many lenders passing on these hikes in full this, in turn, has seen mortgage interest rates rise.
But while the average owner-occupier with a $500,000 variable-rate loan and 25 years remaining has seen their home loan repayments rise by over $830 since April 2022, according to RateCity calculations, many fixed-rate borrowers have been insulated from these hikes.
However, that’s all set to change this year with $370 billion worth of fixed-rate mortgages due to expire over the next 12 months.
These borrowers could face a big jump in their repayments as their home loans automatically roll over onto a revert rate as high as 7.2% (if the cash rate peaks at 3.85% in May, as predicted by Westpac and ANZ).
Four ways to prepare for the end of your fixed home loan interest rate
If you’ve got a fixed-rate home loan that’s due to expire soon, please don’t panic. That’s because there are things you can do now to prepare for and lessen the blow of higher interest rates.
Work out what your new repayment will likely be
The first thing you should do is work out how by much your monthly repayment will likely rise when you roll off your fixed rate. If you can afford it, start putting the extra money aside now – whether that’s in a high-interest savings account or as extra repayments into your mortgage (if your lender allows this). This will help you test your budget while creating a buffer you can draw upon in emergencies.
Explore your refinancing options
Your home loan’s revert rate is unlikely to be the most competitive deal on the market. That’s because many lenders reserve their best rates for new customers so they can win their business. By contrast, existing customers are often charged a higher rate; in other words, punished for their loyalty.
That’s why it’s important to do some research before your fixed-rate term ends to see if switching lenders could save you money. Keep in mind that refinancing won’t be suitable for every borrower as you need to meet the new lender’s eligibility requirements and have sufficient equity in your property. It also comes with fees.
A good mortgage broker like Shore Financial can help you explore all your options and do the sums so you can be sure it’s the right move for you.
Look for ways to cut back on your monthly spending
If you’re expecting a big increase in repayments, review your monthly household budget to see if there’s any discretionary spending you can cut back on. At the same time, review your insurance and utility deals to see if you can save money by shopping around.
Increase your income
Reducing your monthly expenses is only one side of the budgetary equation. You can also look for ways to increase your income so there is more money to put towards higher repayments once your fixed term ends. Options include asking your boss for a pay rise, taking on a second job, renting out a spare room or starting a side hustle.
What to do if you can’t afford higher repayments?
Some borrowers simply won’t be able to afford higher repayments regardless of how many cutbacks they make to their household budget. If this is you, contact your lender as soon as possible as they will be able to explain your options and could offer you a hardship variation such as reducing or pausing your repayments.
Looking to break into the market? We can help. To discuss your options, call Stephen on 0403 972 132, email stephencush@shorefinancial.com.au or fill in the online form below.