Fixed rate expiring? Here’s what to do
With the Reserve Bank due to meet again for the first time in 2023 this month, many homeowners and property investors will be watching closely.
Will they raise the cash rate again? And what does this mean for mortgage holders who locked in a fixed rate during the height of the pandemic?
Many homeowners and investors have taken advantage of historically low fixed rates over the last few years. In fact, we saw a significant increase in many of our clients taking the opportunity to refinance or fix portions of their loans.
As we’ve come out of lockdown and restrictions that had been part of our lives for the last two years, inflation has soared as many Australians spent the money saved over the pandemic.
In response to surging inflation, the RBA has swiftly increased the official cash rate by 300 basis points since May 2022.
But the real impact of the tightening monetary policy is yet to be felt for those homeowners who fixed part or all of their loans. For instance, the difference in repayments between an interest rate of 1.90% and 5.25%, based on a $750,000 balance paid off over 25 years, is $1,351 per month.
When their fixed rate expires during the next year, they are in for a significant increase in their repayments. However, the RBA believes many homeowners and investors can ride out the storm as they have savings to pay for the increased repayments.
However, with higher repayments likely to occur in 2023, here are our tips on how to deal with the increase:
Negotiate a better variable rate with your current lender
For many homeowners and investors, you could pay a ‘loyalty tax’ by remaining with your current bank or broker. However, by staying with your existing lender, you are potentially missing out on exclusive interest rates and discounts offered to new customers (or certain occupations, such as medical professionals).
When your current fixed term ends, your home loan will roll to the standard variable rate unless you take action. This is a great time to negotiate a better deal with your current lender or look for alternatives.
Before contacting your current lender, we recommend you have a comparable offer from other banks. And crucially, be prepared to leave if your current lender will not negotiate.
Independent research shows that when you talk to your lender, up to 70% of clients receive a favourable outcome for their interest rate
Consider refinancing your home loan
If you’re unsuccessful in negotiating a better deal, it’s time to consider the alternatives.
Refinancing your home loan can massively impact how much money you pay over the life of your loan. But as it comes to crunch time, there has never been a better time to unlock a cash-back offer for a new mortgage.
To ensure you give yourself plenty of time to secure the best deal, start reviewing your options around 90 days before your fixed rate ends. That way, you secure the best possible outcome for a property valuation using current, comparable sales.
Otherwise, the further interest rate increase may lead to a further decline in property values eradicating your ability to refinance.
Alternatively, you can discuss extending your existing loan term with your current lender to lower your repayments. For example, if you have
15 years remaining on your home loan, you could ask for approval to extend the loan term back to 20 years.
Review your existing budget with higher repayments
Take some time to review how much your new repayments will be after the fixed rate period ends.
You can do this on our website or most lenders' websites.
If you choose to do it yourself, you must consider the impact on future interest rate rises, so calculate a few scenarios. From here,
you can adjust to your new budget and lifestyle with higher repayments.
Look at opening an offset account
An offset account helps you pay less home or investment loan interest. Your bank establishes a transactional account that is linked to your home loan. It reduces the interest you pay by offsetting the balance against the interest charged on your standard variable home loan.
If you have $80,000 in your offset account and your home loan balance is $630,000, you’ll pay interest on $550,000.
Offset accounts are not available with fixed-rate mortgages. However, you can open an offset account when your fixed-rate period ends and you roll to the variable-rate loan. That way, you can reduce the interest you are charged.
In simple terms, consider opening an offset account if you currently have money in a savings account. Generally, the interest rate charged
on your home loan is higher than the interest earned on a savings account - this way, your money works for you.
Do you need help when your fixed rate ends?
With a sizable increase in repayments as your fixed-rate period ends, alongside the soaring cost of living, we can help you regain control of your finances.
Contact our Mortgage Advice team for a complimentary 15-minute Discovery Call to review your current home loan.