On a fixed rate? How to prepare for the cliff

Borrowers with a fixed home loan should take action now to get themselves ready for rising rates.

Fixing hit record highs halfway through last year as borrowers took advantage of record low rates. However, many of these rates are coming to an end, with the peak of fixed home loans due to expire between July and December next year.

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 another 1.25 percentage points to 3.85 per cent, as forecast by Westpac and ANZ.

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.

One simple way fixed rate customers can prepare, and make sure they can afford this huge jump, is to start paying extra now.

How to prepare for the fixed rate cliff:

• Work out what your new monthly repayment is likely to be when you come off your fixed rate.
• Start making that higher repayment now to see if your budget holds up. This will help you build a buffer while your rate is low. Note some banks have caps on extra repayments, see below.
• Can’t afford it? Make cutbacks to your spending now while you have time and talk to your bank early about your options.

How much you could save by making higher repayments now

RateCity.com.au analysis shows if an owner-occupier fixed their $500,000, 25-year loan in July 2021 for 2-years, on the average big four bank rate, they would be paying approximately 1.94 per cent.

When their fixed term ends in July next year, they could be facing an average revert rate of 7.18 per cent, if Westpac and ANZ’s cash rate forecasts are realised. If they don’t negotiate their rate at this point, their repayments would rise by 65 per cent.

Assuming someone did renegotiate, and landed on a rate of 6 per cent, their monthly repayments would still rise by $1,028. That’s still a 49 per cent rise in repayments.

Source: RateCity.com.au. Assumes borrower took out a 2-year fixed loan, on the average big four bank rate of 1.94% in July 2021. Assumes the borrower moves onto a variable rate of 6 per cent in July 2023.

If the person started making this higher repayment now, they could build up an $8,267 buffer in their home loan by July 2023, in extra repayments and interest saved.

If they kept this extra money in their loan until the end, they could potentially save $17,639 in interest over the life of their loan and pay off their debt nine months early.

RateCity.com.au research director, Sally Tindall, said: “Borrowers who locked in ultra-low fixed rates could see their repayments skyrocket by up to 65 per cent when their fixed term ends.”

“People on a fixed rate shouldn’t put their heads in the sand, but instead take action while they can,” she said.

“Instead of dreading the day your fixed rate ends, consider testing out your budget now by making these higher repayments while your rate is still low.

“Not only will this give you comfort in the knowledge you can tackle the cliff head-on, you’ll also build up a buffer in your loan for emergencies.

“If the numbers don’t add up, then you’ll have time on your side to start making cutbacks before your interest rate rises.

“If your plan is to put the extra money into your home loan, be aware of any caps your bank might have on additional repayments in the fixed rate period.

“Alternatively, borrowers can put the extra cash into a high-interest savings account, ready to transfer across when their fixed rate ends.

“If you opt for a savings account to take advantage of rising interest rates, just make sure you qualify for the maximum advertised rate, and factor in any tax you might have to pay on the interest earned.

“Borrowers on a fixed rate should stay on their toes as they get close to the end of their term. Put a note in your diary at least two months before your fixed term is due to end, so you can start searching for a better deal.

“Lenders are eager for refinancers and will continue to put sharper rates on the table for borrowers willing to make the switch,” she said.

Tips for people looking to refinance when their fixed rate ends:

• Put a note in your diary: Work out when your fixed term ends and put a reminder in your phone at least two months before this date.
• Avoid automatically rolling onto a high variable revert rate: some banks switch customers onto an uncompetitive variable rate unless the borrower renegotiates their rate.
• Do your homework and compare: see what other lenders might be willing to offer you and be ready to refinance if you need to.  Remember a new loan can often take several weeks to settle.

On a fixed rate? Here’s how much extra the big four banks will let you pay

• CBA: up to $10,000 per year
• Westpac: up to $30,000 per fixed rate term
• NAB: up to $20,000 per fixed rate term
• ANZ: 5% of the loan balance or $5,000 per year, whichever is less. (The 5% is calculated at the start of the fixed period)

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