The Reserve Bank of Australia has said it expects about half of all outstanding fixed home loans to switch to variable rates in 2023. This equates to around 800,000 home loans, totalling about $350 billion.
Many Australians were lucky to lock in record-low fixed interest rates on their mortgages in the last few years; but for some, this may be coming to an end in 2023. This will leave affected households paying two to three times their current fixed rate, due to rapidly rising interest rates.
If your fixed-rate home loan is approaching its end, you’ll need to make some decisions. Should you re-fix your loan at a new rate, change to a variable rate, or even consider refinancing to a new mortgage provider?
In this article, we’ll talk through your options when it comes to preparing for the end of your fixed interest rate.
What is a fixed-rate mortgage?
A fixed-interest rate home loan is one where the rate of interest you pay on your mortgage is locked in for a certain period. In Australia, a fixed rate typically lasts between one and five years. During the time your rate is fixed, your interest rate and your compulsory repayments won’t change.
If you fix your interest rate when interest rates are low, you could be saving yourself from paying more when interest rates rise. But for this reason, fixed interest rates tend to be a bit higher than variable rates. While it makes it easier to budget for the future as you know exactly what your repayments will be, you could also be missing out on big savings when the interest rate falls.
Also, many fixed-rate mortgages do not have offset accounts, which means that extra savings cannot be used to reduce interest paid on the loan. With a fixed rate, you are sometimes impeded in terms of how quickly you can pay off the loan. A break fee may be incurred if you want to pay it off early.
What is a variable rate mortgage?
A variable-rate home loan features an interest rate that may change over time, according to the rise and fall of interest rates. If you choose a variable rate home loan, you may be able to take advantage of any interest rate decreases over your loan’s term, meaning you pay less interest on the home loan balance and your repayments go down.
On the other hand, when the interest rate increases, so too will the amount of interest you’re paying, meaning your repayments will go up.
How can I prepare for the switch?
If you don’t do anything before your fixed term rate lapses, your mortgage provider generally switches your loan to its standard variable rate, which can be much higher than some of the discounted options available to new customers.
If you are worried about what will happen when your fixed-rate mortgage ends, you should speak to a trusted financial expert at your earliest convenience. This helps you avoid any scenario where you are stuck with the imposed rate your current lender offers when the fixed rate period ends.
It’s important to research your options because, with each rate increase, your borrowing capacity can be reduced because lender calculations on household expenditure and expenses change. And as house prices fall, you could end up owing more on your house than what it is currently worth. Here are the steps we recommend you take prior to the end of your fixed interest rate.
If you are worried about what will happen when your fixed-rate mortgage ends, you should speak to a trusted financial expert at your earliest convenience. Before you make any decisions, crunch the numbers with an online mortgage switching calculator.
The expertise and experience of our Geelong Mortgage Broking team at The Hrkac Group can help you with your home loan, whether it’s securing a new interest rate for you, refinancing your current loan, or discussing the finance of an investment property. To make an appointment to meet with one of our friendly Geelong Mortgage Brokers, contact us via email or phone (03) 5224 2366.
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