Did you know there are over 500,000 fixed-rate mortgages in Australia scheduled to expire towards the end of 2023?
Because the cash rate was exponentially lower at the time of locking in the interest rate, these fixed-rate borrowers are now facing doubling of mortgage rates (if not more) once the loan is reverted back into a variable mortgage.
If you are one of these borrowers in this position and are worried about how this will affect you and your finances, here are some things to consider to soften the blow of a large price hike.
How Does the Cash Rate Increase Affect My Home Loan?
The cash rate is an interest rate set by the Reserve Bank of Australia (RBA) that lenders have to pay lending institutions for borrowing funds from them. This “base rate” has a direct impact on the amount of interest banks charge on their loan products.
If you have a variable rate loan, the interest rate on your mortgage will be more affordable when the cash rate is low, since you will be paying less interest each month. When the cash rate increases, the banks’ interest rates do too, making the cost of borrowing money more expensive.
For context, the RBA raised the cash rate at the September 2022 board meeting by 50 basis points to 2.35%. The cash rate hasn’t broken the 2% mark since April 2016, so this increase is certainly significant. What’s more, markets predict that the RBA will hike rates by as much as a further 2.865% in the near future.
How Do I Ensure I Can Maintain My Mortgage Repayments Once My Fixed-Rate Period Expires?
Although you may have scored big over the past few years by having locked in a lower interest rate, all good things must sadly come to an end. Your existing loan with fixed interest repayments will expire, and you will have to refinance it with a better variable interest rate.
Refinancing With Another Lender
Once a fixed-rate loan or interest-only loan expires, it typically reverts to the lender’s standard set variable rate automatically. Take note that this interest rate may not be the most competitive one on the market.
It is then recommended to engage a mortgage broker who can compare your current home loan package with others on the market. They can either find another lender offering a better deal, or carry out negotiations with your existing lender to retain your business.
Refinancing a Longer Loan Term
Another option is to refinance your loan so that it spans over a longer period. Doing this will allow you to pay a smaller amount of money each month on your mortgage repayments, but your total expenditure over the course of your home loan will be higher.
A mortgage broker can review various deals and offers available and present them to you. They will weigh up the total potential savings so that you can determine if taking this route is a worthwhile strategy for you.
You may be paying additional fees for access to features like an offset account that you aren’t even using. If you do want a savings account linked to your home loan, consider a more basic package with lower fees and a free redraw facility.
A mortgage broker can take a look at your current loan structure to see if it is still benefiting you, and make suggestions on how you can save money smartly.
Why You Should Get a Mortgage Broker
To qualify, a professional mortgage broker has to undergo extensive studies and training. They therefore boast a wide knowledge set, including on things like:
- different home loans and loan products
- what features these home loans offer
- the different offerings between lenders
- standard home loan interest rates.
This means, they are equipped to give you the best recommendations on which home loans and related products are most suitable for your situation and financial goals. Plus, they are subject to the Best Interests Duty, so they aren’t allowed to intentionally suggest any products or services to customers that will be to their detriment.
It also works in the borrower’s favour that employing the professional services of a mortgage broker is completely free.
Mortgage brokers act as liaisons between you and different lenders, which saves you the trouble of reaching out and communicating with lenders yourself.
When you are thinking about buying a house, your broker will discuss things like the current situation, where a fixed-rate home loan set to expire will become exponentially more expensive. They will also explore all your options so that you have a game plan for if or when it happens.
If your fixed-rate home loan is expiring soon, there are numerous options available to you that can lighten the financial blow of rolling over to a higher variable rate.
- You can refinance your existing home loan with another lender and negotiate a better interest rate.
- Another option is to refinance your loan over a longer term; your monthly repayments will be lower, but you’ll be paying more in total over the lifetime of your loan.
- Look around for special home loan offers that may save you a significant amount of money.
- Review the added extra features you’re paying for and determine whether you can live without them and save that money.
A mortgage broker can be a very valuable asset and help you find the best solution to suit your financial circumstances. Contact a home loan specialist from The Mortgage Agency today and start taking the steps to better your financial future.
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.