What you can do to prepare for the fixed rate cliff

When the Reserve Bank of Australia (RBA) slashed the national cash rate to the record low of 0.10 per cent in response to COVID-19 in 2020, many Australians made the most of these low interest rates by locking in a low fixed rate on their home loan. But with many of these fixed rate deals coming to an end this year, borrowers could find themselves struck down by severe bill shock when they’re hit with multiple consecutive rate rises all at once.

To give you an idea of the scale of the potential fallout, a total of $99 billion worth of mortgages are coming off a fixed rate in the second half of 2023 from Australia’s two biggest banks alone, CBA and Westpac.

Many of these borrowers could be looking at revert rates of over 7 per cent if the RBA cash rate rises to 3.85 per cent.

Source: RateCity.com.au. Assumes borrower had a $500K loan in July 2021 with 25 yrs remaining with a big four bank, fixing for 2 years vs opting for the bank’s lowest variable rate.

 If you doubt your household budget will be able to handle this kind of jump in repayments when your fixed term expires, it’s worth considering your options now while you still have time left.

Switch to a new variable interest rate

If you take no action when your fixed rate expires, you’ll automatically revert to your lender’s variable rate. This is unlikely to be the lowest variable rate they have available, as these are often reserved for new customers.

Rather than paying this loyalty tax, you could consider contacting your bank and ask them to switch you to a lower rate. The bank may be willing to make concessions in order to keep you as a customer. Staying with the same lender could save you the hassle of moving your mortgage elsewhere. It can also be beneficial if you have a package loan that provides worthwhile perks and savings on other financial products, as you won’t have to give these up.

If your lender can’t or won’t make you a deal, you could consider taking your ball and going home… and switching to a different lender. Some mortgage lenders are eager to secure the business of refinancers, and are willing to not only offer discounted interest rates, but other features and benefits such as cashback deals.

Keep in mind that you’ll still need to qualify for a discounted interest rate when you apply, which may be a challenge if your income and expenses have changed since you first applied for your mortgage.

The home loans with the lowest variable rates often require the borrower to have a low LVR (Loan to Value Ratio) to qualify, such as 70 or 60 per cent. And if you have less than 20 per cent equity, you’ll have to pay Lenders Mortgage Insurance (LMI) if you refinance to a new loan. So if you haven’t yet had a chance to build up some equity in your property, you could risk finding yourself trapped in mortgage prison, where refinancing would mean paying more in LMI charges than the value you could receive from lower rates.

Also, remember that even if you switch to a relatively low variable interest rate, it’s likely you’ll still be paying more than your previous fixed rate. And if rates rise further in the future, you may need to adjust your household budget to help absorb this cost.

Take out another fixed term

If you prefer the certainty of knowing exactly what your repayments will be, you may want to take out another fixed rate for a term of one to five years. 

Not every lender will allow you to re-fix your loan, or allow you to do so multiple times, so you may need to switch lenders to stay on a fixed rate. And since the cash rate has changed significantly since you last fixed your loan, you should be prepared for higher fixed rate options this time around.

If you get another fixed rate term, you’ll need to make sure it has all the features you need (and want) so you can make the most out of your home loan. This may include fee-free extra repayments, a redraw facility and an offset account. You’ll also want to consider the break costs you may have to fork out if you decide to sell your property or refinance your mortgage to access home equity during the fixed term, as these can be significant.

Remember, while a fixed rate can protect you from increasing variable rates, it could also leave you paying more interest than necessary. Some economists are forecasting that the RBA could choose to cut the cash rate in later 2023 or 2024 – if you’re still locked into a fixed rate deal, you won’t be able to benefit if variable rates fall.

Split your loan between fixed and variable 

Another option is splitting your home loan between fixed and variable rates, to help you get the best of both worlds. The idea is that the variable portion gives you flexibility, while the fixed portion protects part of your loan from rising interest rates.

These pros do come with a potential con though, and that is that if variable rates fall, you won’t take home the full savings on the fixed portion of your loan.

You should also keep in mind that while most lenders offer split loans, it may not be available for every type of loan, so you could have a smaller range of mortgages to choose from.

You may also be hit with double the fees at the start of (or throughout) the arrangement, because from a lender’s perspective, a split loan involves two separate mortgages.

The worst thing you can do is nothing

When your fixed term home loan is coming to end, make sure to seriously consider your options. Speak to an expert if you need extra guidance, to land on a move you’re happy with.

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