We are currently dealing with complex elements across the Australian economy. Much of them resulted from decisions taken during the pandemic designed to keep the economy stable during that period of uncertainty.
But you can’t have a party without a hangover, and 2022 proved to be the sore head everyone should have been expecting. A sustained period of low-interest rates came to an end as inflation ramped up mightily. To date, we’ve seen the cash rate go from its 0.1 per cent low in March 2022 to 3.1 per cent as of the time of writing.
But the impact of the interest rate hit will be more devastating to some than others, and there’s one group who is set to experience extreme repayment pain – and that’s those coming off their fixed-interest loan period in the coming months.
The fiscal cliff
For those who aren’t aware, a wave of borrowers are about to see their fixed-interest rate loan periods expire, and their borrowings will immediately flip to a variable interest rate. There are reports that more than one in five Australian home loans will see their fixed rates convert by the end of this year.
Those borrowers will see their interest rate climb from 2.5 to three per cent overnight. So, for every $500,000 in borrowings, repayment will rise between $12,500 and $15,000 a year.
And it will happen automatically… unless you take action.
I’ve come up with a strategy that can help borrowers falling over the fixed-rate cliff.
A four-point plan
While there’s little chance of avoiding the rise, there are ways to soften the blow. Here’s my four-point plan for those facing the change.
- Act early
Do not wait until your fixed-rate date ends, act before to make moves to deal with the issue.
If you have loans of any type that are on fixed interest, now is when you should gather together all the information and contact a mortgage broker. Having time to address the problem and look for solutions will deliver the best possible outcome – especially as financiers are often willing to help avoid any drama too. Wait too long, and you will find your options limited.
And in conjunction with a proactive review, we are recommending to all of our fixed-rate borrowers to start making payments at the higher rates on their fixed loans now, as this has 2 primary benefits:-
Firstly, you start to amend your budget and meet these repayments now. You have time to modify your spending and make the tweaks and belt-tightening adjustments well in advance of the shock.
And secondly, you will actually be building in a future buffer, whilst you can’t access redraw etc. whilst on a fixed rate, once the fixed rate expires, you will have access to those funds as a buffer. Hopefully, the changes in point 1 will have conditioned you better, but it is always nice to have a little extra available just for that “rainy day”.
- Be open to all options
Don’t proceed with a narrow mindset about what can be done. For example, loyalty to your long-term financier shouldn’t be part of your considerations. Instead, speak to your mortgage broker about the wide range of finance sources available. The “big four” aren’t the only option in the market. There could be that a smaller lender will deliver the right product for your needs.
One strategy might be to lock in for another fixed interest period.
For example, a quick online search will show there are fixed-interest comparison rates in the market ranging from about 4.5% to 6.5% (this is without looking into the range of conditions attached to each of course). Granted, this will be a long way north of the two per cent rate you were enjoying, but the security of knowing what you’ll have to pay over the coming one to three years might be worth it.
If you are open to variable rates under the right terms, then expect to pay between 4.5 and 5.5 per cent. You will be exposed to future rate rises but will also benefit from rate cuts. Over the course of 25 years, these minor fluctuations will prove more of a bother than a destroyer of your financial security. Also given that variable-rate loans are often more flexible around offset accounts and early repayments without penalty, the short-term risks could prove more appealing.
And another could be to refinance, get a low variable rate and maybe even a cashback offer and also reset your loan to a 30-year loan term to ease the budget pain.
- Take a holistic approach
Another solution is to look at ways of restructuring your entire portfolio and loan arrangements.
For example, you may have been paying interest only on your investment properties while paying down your home loan, resulting in an impressive buffer of funds. It might make sense to redraw that facility and reduce debt on other assets.
For some, it could be a case of reducing debt by strategically selling holdings, depending on their location, price point and property type of course. While markets have softened, there’s still good demand for the right types of real estate, and the realised equity could reduce your debts elsewhere to make servicing your loans far more manageable.
This should of course all be done in concert with addressing your home budget and related cash flow with plenty of help from your advisors.
- Implement strategies
Coming up with a solution won’t count for much if you fail to implement the changes themselves. Make sure you act on the guidance of your professional advisors and do what needs to be done.
If you must reduce spending to improve your chances of refinancing, then do it. If you are needing to pull together additional financial information for the mortgage broker, then don’t hesitate.
Hesitating will only make the situation worse.
The fixed-rate cliff can be reduced to a gentle slope in many cases with the right guidance. Be sure to take advice from an experienced mortgage broker when navigating the challenge.
Finding a great broker requires a little effort on your part, but it will pay handsome dividends in terms of finance success. If you’re looking to secure funds for your next purchase, why not reach out to our team at Intuitive Finance for a chat.
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