How to prepare for your fixed rate home loan to expire
It may seem a distant memory at this point, but two years ago lenders were falling over themselves to cut their home loan rates. Fixed rates, in particular, were reduced to levels not seen in decades, giving borrowers access to an abundance of options around the 2% mark and below.
Understandably, plenty of people made the most of the opportunity to lock in their mortgage rate. In fact, Ryan Gair, chief executive of mortgage management firm Rate Money, says that interest in fixed rates went through the roof.
"We would normally get enquiries about fixed rates around 30% of the time, but during that period it would have been 80-90% of borrowers asking questions around fixed rates. Not every customer took one up, but a huge amount did fix part of their loan or the whole lot."
Since then, there has been a considerable shift in the interest rate landscape though, with mortgage rates having largely followed the perpendicular path of the official cash rate which has risen by 300 basis points since May last year.
The flow-on is that many homeowners who fixed part or all of their loan during 2020 or 2021 are in for a sharp increase in their repayments when their fixed rate expires. For instance, the difference in repayments between an interest rate of 2.00% and 5.00%, based on a $500,000 balance being paid off over 20 years, is $770 per month.
This is no small number of borrowers either. In its latest Financial Stability Review released in October the Reserve Bank revealed that around 35% of outstanding housing debt was on a fixed rate term, and of that portion, two-thirds of fixed rate loans are set to come off by the end of 2023.
One silver lining is that the Reserve Bank believes that some borrowers are likely to have squirreled away additional savings outside of their mortgage during the last few years which could provide a buffer against increased mortgage costs.
Still, with higher repayments on the horizon, are there any moves that homeowners in this position could, or should, be considering? Here are five options.
1. Re-work your budget
One of the first steps borrowers will want to take is to find out just how much their repayments are likely to increase, says Compare the Market's Natasha Innes - either by contacting their lender, or calculating it themselves.
"If your locked-in rate is due to expire this year, it's imperative you book a time with your lender at least a month in advance to assess your financial situation and work out how much you will be paying when the fixed rate ends."
Now, the possibility of more interest rate hikes from the RBA may throw a spanner in the works in terms of working out exactly what interest rate the loan will revert to, but even a rough estimate can help when it comes to readjusting a budget to account for those higher repayments.
"If you don't currently have a budget and your rate is due to expire, it's time to make one," says Innes.
"Look at where your money is going and see where you can cut back and once you've taken a look at your spending, it can be useful to group your regular income in accounts. There are plenty of budget planners available online to take the manual labour out of the process."
2. Negotiate a better rate
Not happy with the competitiveness of the interest rate you're going to be paying when your fixed rate expires? There's no harm in trying to negotiate a better deal with your existing lender - in fact, as Innes points out, there's actually a decent chance of success.
"Just one in three Aussie mortgage holders have tried to negotiate a lower rate this year according to our latest Compare the Market research. Amazingly, of those that did talk to their lender though, 70% said their rate discount negotiation was successful - so this goes to show how important it is to talk to your lender."
If you are going to try and negotiate, Gair says that it's worth coming prepared with comparable offers from other lenders and taking a stance that you're willing to walk away.
"Push hard and tell them that you're going to leave. And even if it's not the rate that you were hoping to get, remember that every little bit of money is going to help your back pocket, even if it's a 10, 15 or 20 point reduction."
3. Think about refinancing
If negotiating a better deal with your existing lender doesn't bear any fruit, it may be time to shop around with a view to refinancing.
"Refinancing can potentially save you a lot of money over the life of your loan. There are an unprecedented amount of cash-back offers on the market right now with great rates attached so it really does pay to shop around when it comes to home loans," says Innes.
"If you find a home loan that you think could offer better value than your current one, whether due to a lower interest rate, lower fees, or access to more loan features - definitely consider it."
According to Gair, some borrowers may want to organise themselves well ahead of when their fixed rate is set to expire though.
"By starting your finance process three to four months prior to your fixed rate ending - if you believe that your property might go down in value in the following months - you're giving yourself the best chance of getting the best valuation you can, as the value will be based on current comparable sales.
"Evaluations with banks and most lenders will last 90 to 180 days which will allow you to get the best valuation that you can, and you don't have to settle the very day that you return your mortgage documents - you can ask to settle on a date that coincides with your fixed rate term ending.
"What you don't want is to put yourself in a position where prices dip and then you don't have enough equity to refinance."
4. Consider an offset account
While not unheard of, offset accounts aren't commonly available with fixed rate home loans. But if you're going to be moving onto a variable or a split rate once your fixed rate expires, Innes says that they're a feature worth enquiring about.
"An offset account is a really valuable transaction account that is worth looking into if you don't have one already. It's linked to your standard variable rate home loan or investment home loan and money you put into your offset account reduces the balance on which the bank charges interest.
"This means you'll only be paying interest on the difference. For example, if you have $50,000 in your offset and your loan balance is $300,000, you'll only pay interest on $250,000 of your loan balance."
Borrowers who did manage to stash some money away in a savings account during their fixed rate period may also want to consider the benefits of moving it into an offset account, because if the rate on the loan is higher than the rate being earned on the savings, that money could be more effectively employed in the offset.
5. Reach out if you need help
Given the size of the jump in repayments that many borrowers coming off low fixed rates are going to experience, and taking into account other cost of living pressures being felt at the moment, it's inevitable that some borrowers will find it difficult to meet their higher mortgage costs.
If you think you're going to struggle with your repayments, ASIC's Moneysmart recommends getting in contact with your lender and their financial hardship team as soon as possible to discuss options like temporary payment reductions or mortgage holidays.
Homeowners in the ACT and Queensland experiencing mortgage hardship may also be eligible for government-backed mortgage relief loans.
"Depending on which state you live in, mortgage relief is available. For example, the Mortgage Relief Loan in Queensland is available to people who are having difficulties with their home loan repayments due to unemployment, accident, illness, or some other unexpected or unforeseen crisis," explains Innes.
"The loan is interest-free with no application fees or ongoing charges. You can borrow a maximum of $20,000, repayable over 10 years in addition to your home loan repayments."
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