Rates on hold: What can I expect when my fixed rate period ends?

With the RBA choosing to keep the national cash rate on hold between July and September 2023, mortgage holders sitting on fixed rates may be breathing a sigh of relief. But there’s a chance that there could be a sting in the tail at the end of each fixed rate term, which borrowers may need to watch out and prepare for.

The basics of variable versus fixed interest rates 

Many Australian home loans have variable interest rates, where the amount of interest a lender charges may increase or decrease over time, depending on a wide range of economic factors. This means that the cost of monthly (or fortnightly or weekly) home loan repayments could change along with the interest rate, affecting Australian household budgets.

Some Australians choose to fix their mortgage rates for a set length of time, often between 12 months and 5 years. This means that even if their lender increases or decreases their variable interest rates, the borrower’s fixed interest rate will remain the same. This ensures that their repayments remain consistent for simpler budgeting during the fixed-rate term. 

Of course, exiting a fixed rate early (such as if you refinance with another lender) often means paying expensive break fees.

Cash rates, mortgage rates, and you 

One of the most significant factors that influences variable interest rates is the national cash rate target, set by the Reserve Bank of Australia (RBA). This is the interest rate that banks charge one another on cash loans to supply financial products and services to their customers, making it serve as an effective benchmark for the “cost” of borrowing money.

In May 2022, the RBA increased the cash rate by 25 basis points, which was the first hike in 11.5 years. Several of Australia’s major banks announced within 24 hours that they would be raising their home loan interest rates accordingly.

At their next meeting in June 2022, the RBA board chose to hike the cash rate by a further 50 basis points; the first rate hike of this size since February 2000. Additional 50-point rate hikes followed in July, August, and September 2022. In October 2022, the RBA took its foot off the accelerator and returned to a 25 basis point hike, which was repeated in November and December 2022.

After a break from meeting in January 2023, the RBA hiked rates by another 25 points each in February and March 2023, bringing the cash rate to 3.60%, before pausing the hiking cycle in April 2023. In May 2023, the RBA resumed the hiking cycle with a 25-point rise, and hiked again in June 2023, bringing the cash rate to 4.10%. In July 2023, the RBA chose to keep rates on hold, then again in August and September, though it may still choose to raise rates again later in the year.  

According to RateCity research, another cash rate hike could mean homeowners with a balance of $750,000 would be paying $1,816 more in mortgage payments than they were in April 2022.

This may not be the last rate rise in the current hiking cycle. While inflation has been cooling, the RBA has long promised to do “whatever is necessary” to bring inflation back to its target range of between 2% and 3%.

What happens when my fixed rate period ends? 

Borrowers who took out a home loan with a fixed interest rate before the RBA’s announcements may be able to avoid some financial stress, as their interest rate (and in turn, their home loan repayments) should stay the same for the rest of their fixed rate period.

However, once that period expires, the mortgage will likely revert to a variable interest rate. This is often the lender’s standard variable rate, which is higher than the discounted variable rate that many lenders offer to attract new customers. And thanks to the cash rate hikes, this variable rate could be higher than you expect, putting you at risk of bill shock and mortgage stress if you aren’t careful.

What are my options when my fixed rate period ends? 

• Stay on the variable rate: If you can still comfortably afford the mortgage repayments after reverting to a variable interest rate, you may be able to continue with your current home loan. Just be mindful that future rate rises could increase your risk of mortgage stress.
• Re-fix: Some lenders will allow you to fix the interest rate on your home loan again once your fixed rate term expires. The new fixed rate may not always be the same as your old fixed rate, but you shouldn’t have to worry as much about your household budget being affected by rate rises. Not every lender will allow you to exercise this option, or allow you to exercise it multiple times.
• Refinance: If your current lender’s variable revert rate has risen higher than you can comfortably afford, or if your options to re-fix your rate are limited, you may be able to switch your mortgage to another lender and refinance onto a lower fixed or variable rate. Keep in mind that you’ll need to fulfil the new lender’s eligibility requirements, such as having sufficient equity in the property, and there may be fees and charges involved when refinancing.
• Contact an expert: If you’re not certain of the best choice for you and your finances at the end of your fixed rate period, a mortgage broker may be able to steer you in the right direction. These home loan experts can look at your finances and recommend some of the best home loan options to suit your specific needs.

Compare home loans in Australia