I’m on a fixed rate that’s ending soon, what should I do?

If you’re among the borrowers who locked in a fixed-rate loan when rates were at record lows, then you’re in a more fortunate position than most other home owners with a mortgage.

Those who opted for a variable rate loan have seen their repayments climb over the past year, with the Reserve Bank hiking the cash rate target at every board meeting since May, pushing up repayments.

The average Australian borrower with a $600,000 variable rate loan now pays about $1155 more each month than they did in April last year before rates started rising, according to calculations using the Domain Home Loans repayment calculator.

RBA governor Philip Lowe has acknowledged that rate hikes have caused a “painful squeeze” on household budgets, but the full extent of that pain hasn’t hit fixed-rate borrowers just yet.

That’s because they’ve been insulated from the RBA’s steepest rate rise cycle in decades, some having locked in rates below 2 per cent while many variable-rate borrowers are now facing the prospect of rates above 6 per cent.

But that’s all about to come to an end this year, with hundreds of thousands of home owners approaching what’s been described as the “fixed–ratecliff”.

The thought of falling off a financial cliff – or more accurately, climbing up one – sure sounds scary, but is it really as disastrous as it’s been made out, and is there anything fixed-rate borrowers can do to prepare?

Home owners who had the foresight to fix their loans when rates were cheapest will soon be in the same boat as everyone else, with the fixed-rate period on about 880,000 loans set to end this year.

When the fixed-rate period on a home loan expires, the interest rate typically reverts to the lender’s standard variable rate. 

For borrowers who fixed in the past few years, those variable rates will be several percentage points higher thanks to the RBA’s incessant hikes over the past 10 months.

This phenomenon has been called a cliff because borrowers will face a sudden jump in repayments as they roll onto much higher variable rates.

While this jump in repayments could come as a nasty shock to some fixed-rate borrowers, households have had almost a year to get ready, and ABS figures show incomes grew at the highest rate in a decade last year.

But the tricky thing is, the cost of living has also soared during that time, with inflation rising 7.8 per cent in 2022 – well above the RBA’s target band of 2 to 3 per cent. 

Meanwhile, savings levels have fallen with Australians spending a higher proportion of their incomes than in the past few years.

The RBA says some borrowers will need to start raiding their savings accounts to afford higher repayments.

“Some borrowers may need to reduce non-essential spending, save less overall and/or draw down on accumulated savings to service their mortgages,” the RBA said in its February Statement on Monetary Policy.

“Some households with low savings buffers and high debt relative to incomes will have to adjust their spending sharply.” 

This adjustment to spending will put a dent in the economy, according to Koukoulas, but that’s not necessarily a bad thing.

“It’ll slow the economy down, there’s no question,” he says. “If people have to find an extra $1000 for their mortgage repayments, that’s $1000 that won’t be available to be spent elsewhere in the economy.”

However, less spending could ease demand on goods and services, helping to slow down inflation, which is essentially the whole point of raising interest rates. “That’s what the RBA is wanting to see,” Koukoulas says

While no one wants to see their repayments go up, the best thing that fixed-rate borrowers can do is take action now.

“If you don’t know where to start, speak to a broker or call your bank and they will be able to tell you what your new rate will be in the current market and your new repayment,” says Domain Home Loans chief executive Kareene Koh. “There is no obligation to do anything yet but use these different free resources to get your facts straight.”

Rather than simply letting their fixed loan roll onto a variable rate and sticking with the current lender, Koh says borrowers should start investigating other options three months before their fixed rate period ends. For borrowers with fixed loans expiring mid-year, that means now.

“Do some ground work 90 days in advance and shop around. You may end up staying with your current bank but having a comparison loan up your sleeve helps your negotiation power.”

Rising interest rates have prompted more borrowers than ever to look for a better home loan deal, and with refinancing levels at record highs, according to the RBA, lenders are competing strongly to entice new borrowers.

How can I can save money to prepare for higher repayments?

Beyond refinancing, there’s plenty that borrowers can do to put themselves in the best position to meet their higher repayments.

Review your household budget – Depending on your situation, this could mean eliminating unnecessary spending, putting off big purchases like a new phone or car, cancelling subscriptions you don’t use or shopping around for a cheaper energy or insurance provider.

Make lifestyle adjustments – Cutting back on “luxuries” like dining out, alcohol or takeaway food and coffee could make a difference. Even switching to generic brands or looking for half price items at the supermarket could reduce your grocery bill.

Use an offset account – One benefit of coming off a fixed-rate loan is that variable mortgages often come with an offset account, whereas fixed-rate loans typically don’t. Money stashed in an offset account won’t earn borrowers interest like a typical savings account, but instead will be deducted from the home loan balance when calculating the interest borrowers need to pay, reducing monthly repayments. In other words, the more money you save, the less interest you’ll pay.

Ask for help – If you’re having trouble meeting your repayments, contact your lender. Banks have hardship teams whose job it is to help you keep a roof over your head if you run into financial difficulty. It may be possible to defer repayments, set up a payment plan, switch to interest-only payments or even extend your loan term to reduce your repayments. Lenders don’t want to force you to sell your home, and this generally only happens as an absolute last resort.

Remember that small changes can have a big impact over time, especially when multiple strategies – like refinancing, budgeting and saving – are combined. And although everyone’s situation is different, the most important thing is that fixed-rate borrowers start taking action rather than sitting back and doing nothing.

Source - Domain.com.au