Holy $h!t! What do I do when my fixed rate expires?
With fixed interest rates expiring, fixed rate home loan holders are understandably concerned they’ll have to pay more.
If you’re wondering what your options are, we have a few recommendations on how to avoid your repayments increasing significantly.
But first, let’s look at average fixed and variable rates over time, recent trends and how this may affect you.
Where are fixed and variable rates at right now?
To get ahead of a changing interest rate environment and due to increasing funding costs, lenders have begun lifting fixed rates. This has led to fixed rates looking different in comparison to last year, as the average fixed rate among particular lenders has doubled across all terms.
Looking at fixed and variable rates as of the 1st of October 2022, the average rate for a $400,000 loan (OO, P&I, LVR>80%) among lenders was:
- Variable rate: 4.97% p.a. (up from 4.10% p.a. last month)
- Big 4 variable rate: 5.65% p.a. (up from 4.68% p.a. last month)
- 1-year fixed rate: 5.06% p.a. (up from 4.84% p.a. last month)
- 2-year fixed rate: 5.57% p.a. (up from 5.43% p.a. last month)
- 3-year fixed rate: 5.81% p.a. (up from 5.79% p.a. last month)
- 4-year fixed rate: 6.07% p.a. (down from 6.17% p.a. last month)
- 5-year fixed rate: 6.30% p.a. (up from 6.29% p.a. last month)
It is predicted that interest rates will rise throughout the year as the RBA continues to attempt to tame inflation, with the cash rate likely to peak in 2023 at 3.35%, according to Westpac economists.
In regard to understanding the trends in interest rates, many have looked overseas to predict what may occur locally. However, it is difficult to compare Australia with other countries as international markets have very different systems. For example, in America, fixed rate mortgages come with longer terms of 10-30 years, whereas in Australia the terms tend to be 1-5 years.
What impact will fixed rate expiries have on loan holders?
According to a recent RBA speech in July 2022, low interest rates throughout 2020 and 2021 resulted in the share of housing credit on fixed mortgage rates to increase from 20% at the beginning of 2020, to nearly 40% at the beginning of 2022.
Many outstanding fixed loans are due to end within the next two years, with the majority of loans set to expire in the second half of 2023. If all fixed rate loans roll over to variable mortgage rates and these rates are informed by current market pricing, it is estimated that around half of fixed rate loans would have an increase in repayments up to 40%. This means that those with fixed rate loans expiring by the end of 2023 would have a median increase of approximately $650 (45%) in monthly repayments.
So, now that we understand the background and trends occurring in the fixed interest rate landscape, how can you avoid paying more?
Go interest only for a period of time
Having an interest only home loan means you only pay interest for a set period of time, usually 5-10 years, along with any other fees, without paying down any of the principal in this time. During this time, repayments are significantly lower in comparison to other loans. Paying interest only can manage your cash flow and save you thousands in the future. To do this, search for the most competitive interest rates which would suit you. This may be with your existing lender, or a new one. Once the interest only period concludes, the home loan will change to a principal and interest home loan for the remaining term, so it’s important to factor in those costs or have a plan in place to refinance at that time.
Move to a different lender
Before you jump ship, it’s worth reaching out to your existing lender to see if they can secure you a better deal. If you are not satisfied, consider switching to a new lender. Banks offer better incentives for new clients, and with a highly competitive market, it is worth checking out different deals. Although you will have to pay fees to convert to a new lender, to combat this, most lenders are offering cashback to cover these fees so you won’t be out of pocket to transfer your mortgage.
Re-fix your current home loan
After your fixed rate expires, you can refix your home loan if your lender allows it. For example, the maximum fixed rate term might be 10 years, however, you may be able to refix for another 10 years if allowed. However, you will not receive the benefits of a new fixed home loan customer. Moreover, refixing may not be a good option if you plan to sell or renovate your property.
Revert to a variable interest rate
If you take no action when your fixed rate expires, typically your rate will revert to a variable interest rate with no additional costs or paperwork, where the rate will usually change to the standard variable rate of your lender. Thus, it is important to discuss this with your lender, as this standard variable rate may be higher than other rates on the market. In that case, refinancing may be a good option.
If your fixed rate loan is due to expire, before choosing a course of action it’s best to chat to your broker about what structure will be the most cost-effective for your specific circumstances.
Looking for advice on what to do once your fixed rate expires? Chat to the team at Orium Finance today.
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