The day that you’ve been apprehensive about is approaching. For the past year or more, you’ve benefited from a historically low interest rate, but now your fixed-rate home loan term is concluding.
So, what should you do? Should you cower under your bed, hoping for the best? Or, should you rely on your current lender to provide you with a competitive rate when your loan changes to a variable rate? Alternatively, should you start preparing and doing your research ahead of time?
The correct answer is number 3, without a doubt. Although none of us relish the prospect of doing homework, now is not the moment to be idle. While we would all like to believe that our current lender has our best interests at heart, the truth is that they may not even switch you to the most competitive variable rate available to new clients.
More than one in five Australians will have their fixed rate loans end and see their interest rate more than double in some instances in 2023. If you’re facing the fixed rate cliff, it’s time to start preparing your financial parachute, so to speak.
The interest rate hike
In May 2022, the Reserve Bank of Australia began hiking the cash rate in order to curb inflation. Each month, we saw consecutive rate increases to December, leaving many borrowers feeling the pinch.
At its first meeting in 2023, the RBA put the cash rate up a further 25 basis points, bringing it to an 11-year high of 3.35 per cent. The decision came after Australia’s inflation rate unexpectedly rose 1.9 per cent in the fourth quarter of 2022.
Wind back the clock to 2020 and 2021, and it was a different story. Many borrowers made the most of historically low fixed mortgage rates of between 1.75% and 2.25%.
While these borrowers may have escaped last year’s interest rate increases, now those fixed terms are ending and what’s ahead may be daunting… interest rates of around 5% to 6% and a significant and sudden increase in repayments.
How to prepare for the end of your fixed interest rate term
Review your budget
If you haven’t already done so, it’s recommended that you establish a budget now. This will enable you to have a comprehensive understanding of your income and expenses.
By creating a budget, you may choose to modify your lifestyle and spending habits so that you are in a more favorable financial position once your fixed term concludes.
Work out your repayments
It is advisable to inquire with your lender about the rates and repayments that will be applicable to you once your loan changes to a variable rate. If your budget and current loan permit, it may be beneficial to commence making that repayment now.
By doing so, you will become accustomed to budgeting for the higher repayment and gradually accumulate a financial cushion for when the fixed term concludes. If you have already been making additional repayments or have raised your monthly repayment amount, you may already have some savings to fall back on in case of rising interest rates.
Shop around for a better rate
It’s advisable to get in touch with us two to three months before the end of your fixed rate term, as we can guide you through your options. We could potentially secure a more favorable interest rate with your current lender, especially if you have already paid off a significant portion of your property. In other cases, we might recommend considering other lenders. It’s worth noting that while interest rates may be on the rise, there is still a lot of rivalry among lenders to attract borrowers.
Reach out if you’re struggling
If you are having difficulty making your repayments or are at risk of defaulting, get in touch with your lender’s hardship team. It’s best to do this early, before the situation gets worse.
Contact your Broad Finance Mortgage Broker to help
As your mortgage broker, we can help you prepare for the fixed rate cliff and ensure you are in the best position to land safely.
Don’t wait until you’re in financial distress to do something. Get in touch today to discuss your options.