Fixed rate expiring on your mortgage? Here’s what to do

Financial Planning, Home buying & selling, Investing
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fixed interest rate blog

We’ve been living in tumultuous financial times. The RBA’s previous suggestion that interest rates would hold at their low settings until 2024 went out the window in May this year. Spiking inflation saw the Reserve raise the cash rate by half a percent. Monthly increases continued, and the cash rate has now gone from a 0.1% low to 2.6% at the time of writing – and with more increases likely.

While that shift has been a cashflow challenge to business and household budgets, there is one group in particular that’s in for a rude shock – and it’s those whose fixed-interest-rate period is coming to an end.

Trouble brewing

First a little fixed-rate 101 to help paint the picture.

A fixed rate mortgage sets your monthly repayments at a specified rate for a certain period, usually between one and five years. For the duration of the fixed term, your loan repayments remain the same. Once the fixed rate period ends, the home loan reverts to the standard variable rate. 

And that’s where the troubles will occur.

At the height of the pandemic, and in order to stave off a potential recession then, the Reserve Bank issued the banks up to $2 billion dollars at zero percent, that they could on-lend to borrowers. And this is where we had a fixed rate frenzy with the major banks offering customers interest rates as low as 1.79% and fixed for between 2 and 4 years. These rates were unseen ever before in a fixed rate environment.

So fast-forward now to 2 years later where some fixed rates are starting to expire and herein lies the problem!

Now, as all these loans come off their fixed rate period, borrowers are facing refinancing the same products for between 4.8% and 5.8% – or a sudden increase of around 2.5% to 3.0% more in an immediate and dramatic fashion.

Given the average mortgage in Australia is approximately $590,000, that’s an additional $1230 to $1475 per month in interest alone. This will be challenging for borrowers who may already be living on their budgetary edge.

So, what are these people to do? Here are my thoughts.

Understand the shift is normal and temporary

The sort of interest rates we’ve been dealing with since early 2020 were emergency-level settings, so they were never going to last forever. My first piece of advice is for borrowers to take a breath, relax and look at the situation for what it is – normal cyclical rate movement over time.

We are simply passing through an entirely manageable adjustment period.

By keeping a calm head and looking at your numbers holistically, there will be ways and strategies for dealing with rate changes and plotting a path that keeps your borrowing arrangement under control.

Don’t take bank advice at face value

When approaching your financier remember their place in the arrangement. They want to keep you as a client and lend you funds, but they’re also not going to voluntarily eat into their own margins.

This gives you some leverage in the deliberations. If they offer a refinance when the fixed-rate period ends, look at the product they’re presenting and ask a few questions, such as:

  • Is this the best you can do under these circumstances?
  • What would you be offering new customers to win their business?

This is where an experienced mortgage broker’s skills come to the fore. They can represent your best interests in these discussions.

Consult a mortgage broker

This should be at the top of the list for those exiting their fixed-interest period.

Mortgage brokers are qualified and experienced in finding the best possible deal to meet your needs. They are perfectly positioned to take you through the options from the current variable rates to the new fixed rate choices.

They also take the time to comprehend your circumstances and requirements – both short and long term – and unearth the loan product that will best work for you.

Mortgage brokers also understand how the system works and ways to get the best outcome for their clients.

Look after you first

It’s essential to keep your needs first and foremost as part of the process, which means selecting the right loan package for you. Financiers will have set products they push to customers to meet their own agendas. They may even look to ‘incentivise’ you in some minor way or play to your customer loyalty.

But have an open mind on who you deal with. Ensure their products are designed to fulfil your wants as a client, not theirs as a financial institution.

A good mortgage broker can mould the account set up and have it tailored to suit you, not the bank.

Don’t just think “Fixed or Variable?”

The interest rate being offered is an important component of your loan arrangement, but there are many more considerations to take into account when selecting what loan terms to accept.

You may be attracted to a fixed loan arrangement because of your risk profile and financial tolerance. Certainty about the amount you are paying each month can reduce stress.

That said, no additional payments can be made on a fixed-interest loan to ‘get ahead’ and build a buffer.

Perhaps the solution is to adopt a variable-rate loan and make extra payments each month. This builds a financial margin you can draw on in the future if cashflow gets tight. One great approach is to calculate your repayments based on a higher interest rate, say 7%, and make these monthly commitments to your loan. This will quickly build up funds in your account for potential redraw.

Variable-rate loans also allow for utilising an offset account which can provide ready access to funds and reduce your interest costs.

The benefits of these more flexible options (when used correctly) can save you thousands over the life of the loan.

Shop around

Being loyal doesn’t pay when it comes to borrowing. Make no mistake – lenders want borrowers, and they will compete for your business.

Shop around what you have to offer. There are some great rates and cashback incentives on the market which could see you getting a better loan structure and/or interest rate and be rewarded for it.

Don’t hesitate

Finally – do something about your situation! If you do nothing and somehow magically expect to get a better deal, you are in for disappointment. Failing to act could cost you hundreds, if not thousands, annually.

Instead research the market, challenge your current lender and speak to a professional mortgage broker about your options.

When it comes to dealing with the approaching end of your fixed-loan arrangements, solutions are at hand. Be proactive and utilise professional assistance to ensure you get the refinance terms you deserve.

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Andrew Mirams