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5 Scenarios On What You Can Do After Your Home Loan Fixed Rate Ends

Aug 1, 2022 | Finance, Home Loan Specials, Property Investing, Purchasing Property

Source: https://www.afr.com/wealth/personal-finance/what-to-do-when-your-fixed-rate-ends-20220530-p5apnw

Record numbers of borrowers are set to switch or roll into their lender’s default rate when they reach the end of their fixed terms. This comes as rising cash rates and bond yields rapidly push up the costs of borrowing.

According to investment bank UBS, borrowers with $350 billion of fixed-rate loans could get a mortgage shock of 20-40 per cent when they roll into higher rates over the next few years.

Surprisingly though, a recent survey by a mortgage broker company reveals that more than half of borrowers don’t know the rate they are paying or even thinking whether they intend to re-fix their rate or choose a variable rate loan.

What happens when your fixed rate period ends?

For those who took out a home loan with a fixed interest rate before the RBA’s announcements, their interest rate (this means their home loan repayments too) should stay the same for the duration of their fixed rate period. This provides them a reprieve from getting financial stress until the period ends.

Once that period expires though, most likely their mortgage will revert to a variable interest rate. Often, this rate is the lender’s standard variable rate and is higher than the discounted variable rate many lenders often offer as a way of attracting new borrowers. Because of the rising cash rate, this variable rate is most likely higher than borrowers expect, and if they aren’t careful, could put them at risk of bill shock and mortgage stress.

What Can You Do After Your Home Loan Fixed Rate Ends?

RateCity, one of Australia’s leading financial comparison websites which monitors rates and fees, provides five scenarios that covers some options faced by fixed-rate borrowers whose loans were ending.

These scenarios are based on:

  • An owner-occupier paying principal and interest on a 25-year, $1 million loan fixed for two years in 2020.
  • The average rate of the big four banks, currently at 3.5%.
  • An assumption that the cash rate will increase from 1.35% to 2.25% by May 2023, according to projections by Westpac.

 

1st Scenario: If no action is taken and loan rolls on to the revert rate, currently at 3.66% and forecasted to rise to 5.66% over the next two years, the borrower ends up paying $95,000 in interest and fees over the two years.
2nd Scenario: If the borrower negotiates with one of the big banks to refix for the next two years, with the big four banks’ average two-year fixed rate, which is between 5.5% and 5.79%, the borrower would end up with repayments of around $110,000 for the two years.
3rd Scenario: If the borrower renegotiates to the lowest variable rate of the big four banks, currently averaging at 3.39% but forecasted to rise to 4.32% over the next two years, the borrower would end up in repayments of approximately $77,000 for the two years.
4th Scenario: If the borrower refinances to any of the cheapest variable rates from any lender, now under 2.7% but projected to rise to almost 4% over the next two years, the borrower would have repayments of up to $67,000 for the two year period.
5th Scenario: If the borrowers would refix for two years with one of the cheapest rates on offer from any lender (currently at 4.69%), they would end up in $93,800 in repayments for the period.

 

Our Comments

Variable rates look a lot more attractive than fixed rates right now but borrowers should remember that the current rates aren’t staying at these levels for a long time. Borrowers should factor in that the cash rate could rise to over 2% by May 2023.

Low-risk borrowers with steady incomes, a good record of repayments, and have already more than 20% of equity in their property should be able knock off around 1-2 percentage points.

Whether you decide to choose any of the five scenarios listed above, we highly recommend getting expert advice from your trusted mortgage broker or expert. Borrowers should also be closely monitoring their mortgages and be ready to negotiate a cheaper rate when the opportunity arises.

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