How you can survive the looming mortgage cliff

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In late 2021, when the cash rate was near zero and talk of an increase was growing due to inflation, I paid $3000 to break my fixed mortgage contract with Commonwealth Bank.

I switched to a new four-year fixed rate of 1.89%. At the time, I worried the cost might be too high. Within a year, however, I was saving over $3000 every two months in interest.

As interest rates climbed, I watched with concern as the proportion of Australians struggling with home loan repayments rose from 26% to 42%. Meanwhile, the share of renters who believed they'd never afford a home jumped from 28% to 37%, according to Finder's Consumer Sentiment Tracker data.

how to survive the fixed rate mortgage cliff

My low fixed rate cushioned me from the impact of these cost increases-until this month, when my fixed term expired. Overnight, I felt the full force of 13 consecutive cash rate hikes. The jump in my mortgage costs was significant, but I found several strategies to help manage the financial strain.

Recent cash rate movements

Since May 2022, the Reserve Bank of Australia (RBA) has raised the cash rate 13 times, increasing it from a record low of 0.1% to 4.35%.

Over the following period, headline inflation has eased from a high of 7.8% to 2.4%. Trimmed mean inflation, which excludes volatile price movements, has decreased to 3.2%, falling below the RBA's forecast of 3.4%.

This decline suggests that an RBA cash rate cut could occur next month. However, multiple reductions would be required to bring home loan rates back to their previously affordable levels.

For those currently facing a rate increase or managing a higher rate than desired, there are several strategies to consider.

Build a savings buffer

In a high-interest environment, it's wise to save as much as possible in a savings account before your fixed rate ends.

This allows you to take advantage of competitive rates while building a financial cushion. Right now, online banks such as Ubank and ING tend to offer better ongoing rates than the big four.

Once your fixed term expires, you can use these funds to pay down your loan principal.

Unlike during a fixed period, there are no fees for extra repayments once you're on a variable rate. Reducing your principal can significantly soften the impact of higher interest rates, potentially saving thousands over the life of your loan. In my case, this strategy reduced our monthly repayments by over $1000.

Investigate options with your lender

With a savings buffer in place, it's time to explore ways to cut costs with your current lender. Commonwealth Bank's Wealth Package, for instance, lowers its standard variable rate from 8.80% to 6.34%.

While the package costs $395 per year, it could save the average borrower with a $640,000 loan over 40 years over $12,000 annually. Savings could be even greater for those with larger loans or properties in capital cities. Other banks have similar programs.

Another effective tool is an offset account, which is a transaction account linked to your home loan.

The balance in this account offsets your mortgage principal, reducing the interest you pay. Once my fixed rate expired, I transferred all my savings into mine. Instead of earning 5.00% interest in a savings account, I'm now saving 6.01% in interest by keeping those funds in my offset.

Consider refinancing

If you can't reduce your mortgage costs enough with your current lender, it might be time to consider refinancing.

This involves switching to a new lender or home loan to secure a lower interest rate or better loan features (like an offset account). Refinancing can help you access a more competitive variable or fixed rate, potentially saving thousands over the life of your loan.

Comparison sites like Finder make it easy to compare offers, and the process is now relatively seamless. Some lenders are currently offering variable rates as low as 5.5%.

Fix or split

Many fixed loan rates are lower than their variable counterparts, with rates starting at 4.99% in today's market.

This makes fixed loans an appealing option for borrowers who value predictable repayments. However, in a climate where interest rates are expected to fall, locking in your entire loan at a fixed rate may not be the most strategic choice, as you could miss out on future savings.

A split loan offers a balanced solution by dividing your mortgage into fixed and variable components.

With this approach, part of your loan is fixed at a guaranteed rate, providing stability and shielding you from potential rate hikes, while the other part remains variable, allowing you to benefit from any rate reductions.

Seek professional advice

If you're unsure of the best strategy, consulting a financial adviser or mortgage broker is a smart move. They can assess your personal circumstances and help you find the most effective solution.

The bigger picture

For many Australians, the fixed rate mortgage cliff is a tough reality, but with the right approach, it doesn't have to derail your finances. By planning ahead, negotiating with lenders, and utilising comparison sites, you can manage the transition more smoothly.

Lenders want to keep your business, so don't hesitate to push for a better deal or switch to a more competitive provider. This period of financial adjustment can also be an opportunity to reassess your broader financial strategy, ensuring you're well-prepared for the years ahead.

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Graham Cooke is the head of consumer research at Finder and one of Australia's leading personal finance experts. He has written for several news publications, including The Sydney Morning Herald, The Age, Yahoo Finance and Nasdaq. Graham has also appeared on live TV more than 1000 times, regularly discussing financial topics on Australian programs including ABC News, Channel 7 & 9 News, Today and Sunrise.
Comments
Robert Wilkinson
January 29, 2025 5.14pm

Savings in a bank account also attract personal income tax thereby reducing your return. Money in an offset account effectively dodges these taxes.

Graham Cooke
Verified
January 30, 2025 10.44am

Good point Robert, should have mentioned that also.