Navigating the Fixed-Rate Mortgage Transition

  • Navigating the Fixed-Rate Mortgage Transition

The November rate rise was the 13th from the RBA since early last year and took some people by surprise.

Many thought the central bank was done hiking and this one served as a reminder that nothing is guaranteed in the fight against inflation.

It also put another dent in the monthly finances of the approximate third of the population with a home loan.

These borrowers are now paying substantially more than they were 18 months ago. And it will feel a bit like it’s all for nothing as they are paying down the same amount of principal on their home loans, but a whole lot more in interest, which just disappears into those record profits of the banks.

Fixed rate cliff

Borrowers on variable rates have been feeling the pinch incrementally with each rate rise, but those who fixed their loan rates back when the cash rate was at 0.1% will have been left largely unscathed so far.

These are the people who, if they haven’t taken the opportunity to prepare, will be shocked by extra repayments when their fixed rate period ends and their mortgages roll over to variable rates.

Some borrowers fixed their rates at around the 2% mark and are facing rates of 6% and up at some point in the next few months. For context, if you had a $1 million mortgage, you would go from paying $20,000 interest a year to $60,000. Do you have a spare $40,000 a year?

Building a financial cushion

Data released by the Australian Prudential Regulation Authority (APRA) in January 2022 revealed that over the previous two years of Covid lockdowns, an extra $50 billion had been added to Australian mortgage offset accounts.

Average borrowers at that time were 45 months ahead of their principal and interest mortgage repayments. And it was a good thing because many needed every minute of that buffer.

It goes some way to explaining why, even after 13 rate rises and a cash rate of 4.35%, there still hasn’t been a mass sell-off of properties.

It shows the importance of creating a buffer while you can. So if you’ve been on rock bottom fixed rates and haven’t created a financial cushion, it’s best to do what you can between now and rollover time.

This includes using a mortgage offset account if you don’t already have one. The offset account allows you to build savings and pay less interest on your loan at the same time.

Strategies to mitigate increased repayments

Refinancing rates have been at record highs over the last year as people look for a better deal to save money on their new higher repayments.

Before your fixed rate term finishes, you should get to know what the best variable rates are in the market, as well as what other fees and features come with them.

That way, you can either refinance to a better deal with another lender, or use your market knowledge to negotiate a better rollover rate with your current bank.

The next strategy is to look at tweaks you can make to your expenses to cover some of the extra you’ll soon need to pay. Do you really need all 5 of those streaming services? Could you switch energy providers for a better deal? Can you halve the number of takeaway meals you order? These little changes can add up to hundreds of dollars a month.

Assessing long-term financial goals

Now it’s time to take a look back at your long term. Checking in with a financial advisor could help ensure your strategies will still work with the increase in rates.

If you have wiggle room, consider switching up your repayment strategy and making as many extra repayments to your loan as you can while your rate is still low.

Paying down that extra principal while on the fixed rate can have a compounding effect and save thousands of dollars, plus time on your overall loan term.

Communication with lenders

One thing some borrowers forget is that banks don’t want their customers to default on their mortgages. First of all, it would mean the bank would also lose money as they’d sell your property and miss out on years of interest payments. Then there’s the whole responsible lending chestnut. If a bunch of their borrowers default, the regulator will start asking questions and they can ultimately face penalties. So if you are worried, don’t waste any time engaging with your bank.

All major lenders have support services for customers experiencing financial hardship. You may be able to change the terms of your loan, or temporarily pause or reduce payments. You can then make a plan to get back on track.



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