Two years ago fixed rates were reduced to levels not seen in decades, giving borrowers access to rates around 2 per cent and below.
Since then, there has been a considerable shift in the interest rate landscape with the Reserve Bank of Australia lifting the cash rate from a historic low of 0.1 per cent to 4.1 per cent within 13 months.
At its November meeting, the RBA hiked the cash rate for the 13th time within 19 months, taking the benchmark interest rate to 4.35 per cent.
While the strain from interest rate hikes has impacted many, home owners who fixed their loan in 2020-2021 are facing hundreds, and in many cases thousands, of dollars extra a month in repayments once they roll off their fixed-rate.
RBA data shows there were 590,000 mortgages that came off fixed rates in 2022, and there will be 880,000 in 2023 and 450,000 in 2024.
If your fixed-rate home loan is ending, experts say there are practical things you can do now to prepare.
What happens when your fixed-rate home loan expires?
Your home loan will typically revert to your lender’s standard variable rate at the end of your fixed term.
While this may sound like the easiest option to take, Two Red Shoes mortgage broker Brett Sutton said these rates can often be higher than other deals on the market.
“We often find that there aren’t many lenders out there that offer existing customers ‘new to bank’ rates,” Mr Sutton said.
“This type of scenario is also typical with insurance renewals and gym memberships, and is known as a loyalty tax.”
So instead of taking a back seat, it can be wise to review your options and start preparing earlier.
Take action for when your fixed-rate ends
Here are a number of steps you could consider taking if you’re approaching the fixed-rate cliff:
Create a buffer
Instead of sitting back and enjoying a low rate, Mr Sutton suggests working out what your repayments would look like when you roll off the fixed rate and how it fits into your current budget.
“Review what non-essential costs you are carrying that could be culled to assist in covering the increased mortgage repayment,” he said.
Even with a fixed-rate, most lenders let you make extra repayments, but there might be conditions attached such as a cap.
“If there are no penalties in doing so, start making increased repayments before you need to,” Mr Sutton said.
“This helps you trial the new repayment amount and gives you real time feedback if further budget adjustments are required.
“The excess will build in the home loan providing you with an increased buffer for life events and saving you interest.”
Negotiate a better rate with your current lender
Before you agree to automatically roll onto your lender’s standard variable rate, Mr Sutton says you should be ready to renegotiate a cheaper rate.
“Contact your lender and let them know your dissatisfaction with the rate and potentially give them an indication that you are looking to refinance elsewhere by requesting a discharge form,” he said.
“This will inform them that you’re serious about leaving, and is typically when they’ll come to the party with their best rate.”
He said a lender’s strategy is to retain borrowers so they will likely be willing to have that conversation with you.
Refinance with a new lender
If your current lender doesn’t want to come to the party, you could try and refinance your loan elsewhere to potentially score a better deal.
According to Savings.com.au analysis on a $500,000, 30-year principal and interest loan, the monthly repayments with a rate of 5.75 per cent per annum (p.a.) would be around $2,918, compared to monthly repayments of $3,079 at a rate of 6.25 per cent p.a
That’s a $161 saving per month. Over the life of the loan, it would work out to be a total of $57,860.
However, Savings.com.au money analyst Dominic Beattie warns some people may have to pay lenders mortgage insurance (LMI) for a second time in order to refinance if the equity in their property is below 20 per cent.
“The cost of LMI alone — often several thousand dollars — may override any short-term savings you’re hoping to generate by refinancing, so you’ll need to calculate whether it’s worth it,” Mr Beattie said.
“In some very specific circumstances, you may qualify for a partial refund of the first LMI premium you paid, but don’t count on this.”
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Financial disclaimer: This is general advice only. Please see a professional for advice on your individual circumstances.
Source: abc.net.au