The cash rate is 2.60%: what to do when your fixed term ends

If you’re one of the lucky homeowners who locked in a low rate on their home loan before the recent rate hikes, give yourself a pat on the back (and consider buying a lottery ticket with some of your savings).

That being said, it’s important to be realistic that your fixed rate period will come to an end, and you could be entering into a much higher rate environment. Particularly if you secured a rate below, or close to, 2%.

Following today’s decision from the Reserve Bank of Australia to hike the cash rate by 25 basis points, variable rate homeowners will be experiencing yet another increase to their mortgage repayments. So, what happens if you’re on a fixed rate and your low-rate holiday is soon coming to an end?

What to do when your fixed rate period is ending

When a fixed rate period on a home loan ends, one of two things may happen:

1. Your rate will revert to the lender’s standard variable rate. This is typically a higher-than-average interest rate – even in the current market.
2. You may have the option to refix. Unfortunately, fixed rates will not be as low as they were when you last fixed.

The trouble for homeowners facing these two choices is that regardless of what you decide, you’re entering a much higher rate environment. This means that burying your head in the sand about your fixed rate period ending will likely result in you paying a lot more in your mortgage repayments.

Instead, it may be worth setting reminders and putting in place a plan now to make the gap between your current rate and a new rate less severe.

Planning for the end of a fixed rate period

• Set a calendar reminder

Whether your fixed period was one or five years, you’ll want to set a reminder in your calendar for exactly when your fixed rate will expire. At least three months before your fixed rate period expires, it may help to be proactive and compare your options, in order to lock in the best home loan rate for your situation and goals.

• Can you afford higher repayments?

After months of home loan rate hikes, there is a chance your current lender is no longer offering the most competitive home loan options for your needs or budget. You’ll want to take stock of your current lender’s offerings, and determine if refixing to one of its current fixed rates would be affordable, or if you could afford its ongoing variable home loan rate.

Hop onto their website and do some research. Then use RateCity’s Mortgage Repayment Calculator to determine how much more your repayments could be with these new, higher interest rates. If these options will put serious stress on your household budget, it could be worth considering refinancing.

• Compare your options

If you’ve had your home loan for a few years and you’ve built up a bit of equity, you may be in a healthy position to consider comparing new home loan options. This is why it may be worth starting this process a few months out from the end of your fixed period, as the settlement process for switching lenders can take up to a month.

Comparing home loans can feel intimidating, but a comparison table may be a helpful way to compare apples with apples. Simply enter your personal details, such as your current loan amount and term, or more granular information such as features or specials you’d want. You’ll then be shown a range of home loan options side by side, so you may easily compare key factors like interest rates, fees, and estimated monthly repayments.

• Start the refinancing process

If you’ve found a home loan you’d like to switch to, it may be worth reaching out to their customer service team. Let them know your fixed rate period is coming to an end and that you’re interested in refinancing. The lender should ideally be able to organise the timing of your refinance so that you do not risk paying a costly break fee from your current lender. A break fee is charged when a customer ends a fixed rate period early, and given that refinancing is not without its costs, you may want to avoid this if possible.

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