With home loan interest rates set to enter a new era of rate hikes after May’s RBA meeting, holders of fixed-rate mortgages may breathe a sigh of relief. But it is possible that there will be a sting in the tail at the end of each fixed rate term, which borrowers may need to watch out for and be prepared for.
The Basics of Variable Interest Rates vs. Fixed Rates
Many Australian home loans have variable interest rates, where the amount of interest charged by a lender can go up or down over time, depending on a wide range of economic factors. This means that the cost of monthly (or bi-monthly or weekly) home loan repayments could change with the interest rate, affecting Australian household budgets.
Some Australians choose to fix their mortgage rates for a fixed term, often between 12 months and 5 years. This means that even if their lender raises or lowers their variable interest rates, the borrower’s fixed interest rate will remain the same. This ensures that their repayments remain consistent for easier budgeting over the term of the fixed rate. Of course, getting out of a fixed rate early (as if you’re refinancing with another lender) often means paying expensive break-up fees.
Spot Rates, Mortgage Rates and You
One of the most important factors influencing variable interest rates is the national cash rate target, set by the Reserve Bank of Australia (RBA). This is the interest rate that banks charge each other on lending cash to provide financial products and services to their customers, making it an effective benchmark for the “cost” of borrowing money .
In May 2022, the RBA raised the cash rate by 25 basis points, which was the first hike in 11.5 years. Several of Australia’s major banks announced within 24 hours that they would raise their interest rates on home loans as a result.
According to research by RateCity, this could result in an Australian with a $500,000 25-year home loan paying $65 more per month. And with the RBA saying more rate hikes can be expected in the future, holders of variable interest rate mortgages could soon be at risk of mortgage stress.
What happens when my fixed rate period ends?
Borrowers who took out a home loan with a fixed interest rate before the RBA announcements might be able to avoid some of that financial stress because their interest rate (and therefore their home loan) should remain the same for the rest of their lives. fixed rate period.
However, once this period expires, the mortgage will likely revert to a variable interest rate. This is often the lender’s standard variable rate, which is higher than the discounted variable rate that many lenders offer to attract new customers. And thanks to the rising cash rate, that variable rate could be higher than expected, putting you at risk for bill surprises and mortgage stress if you’re not careful.
What are my options at the end of my fixed rate period?
- Stay on the variable rate: If you can still comfortably afford the mortgage repayments after returning to a variable interest rate, you may be able to continue with your current home loan. Remember that future rate hikes could increase your risk of mortgage stress.
- To fix : Some lenders will allow you to re-fix the interest rate on your home loan once your fixed rate term has expired. The new fixed rate may not always be the same as your old fixed rate, but you shouldn’t have to worry so much about your household budget being affected by rate increases. Not all lenders will allow you to exercise this option or will allow you to exercise it multiple times.
- Refinance: If your current lender’s variable return rate has increased more than you can afford, or your options for resetting your rate are limited, you may be able to transfer your mortgage to another lender and refinance it at a different one. lower fixed or variable rate. Keep in mind that you will need to meet the new lender’s eligibility requirements, such as having sufficient equity in the property, and that fees and charges may apply when refinancing.
- Contact an expert: If you’re unsure of the best choice for you and your finances at the end of your fixed rate period, a mortgage broker may be able to point you in the right direction. These home loan experts can review your finances and recommend some of the best home loan options to meet your specific needs.