My fixed rate home loan is about to expire. What should I do now?

11 March 2023

Having a fixed interest rate home loan can be reassuring, particularly when interest rates are on the rise. But what happens when the fixed term expires and how do you make the best financial decisions in a changeable market?

The uncertainty of the COVID-19 pandemic caused a surge of mortgage holders seeking out fixed term home loans, as some lenders cut their fixed rates below 2%.

For many property owners, these terms will expire this year, fuelling concerns about heftier repayments under a much higher variable interest rate, amid the current higher cost of living pressures.

This week, the Reserve Bank of Australia increased the cash rate by another 0.25%, marking the 10th consecutive interest rate rise since May last year.

The move takes the cash rate to 3.6% – a new 11-year high – but there may be relief in sight, with RBA Governor Philip Lowe indicating that the Board may consider a pause on further increases depending on the state of the jobs market and inflation when it next meets in April.

“The Board recognises that monetary policy operates with a lag and that the full effect of the cumulative increase in interest rates is yet to be felt in mortgage payments,” Dr Lowe said.

“There is uncertainty around the timing and extent of the slowdown in household spending. Some households have substantial savings buffers, but others are experiencing a painful squeeze on their budgets due to higher interest rates and the increase in the cost of living.”

So how do you best handle the transition from a fixed rate home loan and what options are available?

The process

It’s wise to seek advice from a mortgage broker or banker well before your fixed interest rate term ends.

Banks and lenders will generally notify you a month before the expiration of your term and will offer some variable and fixed rate options for you to consider.

Keep an open communication with your mortgage broker and ask them to compare these offers against other lenders. It’s also possible to ask your bank to improve on their offer if you believe it could be more competitive.

Increased serviceability

If your loan reverts to a variable rate, you will need to be prepared to pay more to service your loan, and the amount of interest you pay will continue to fluctuate with any future interest rate rises.

For example, if you have a $500,000 home loan, you’re likely to pay an extra $900 a month once your fixed term expires or around $1700 more a month if you have a loan of $1 million.

Refinance rebates

Many banks and lenders are offering incentives and refinance rebates if you opt to refinance with a new lender, and these can be up to $5000.

You could potentially save thousands of dollars and reduce your monthly repayments by switching lenders and refinancing your current home loan.

It would be worth speaking with your mortgage broker about these incentives as they should be expert in reading any fine print and any possible limitations.

Options

There are a few options available once a fixed home loan term ends, including taking the variable revert rate, re-fixing the interest rate on your home loan or refinancing with another lender.

  • Revert to the variable rate: You may opt to switch to a variable interest rate and continue paying off your current home loan. However, in the existing economic climate, this could mean that future rate rises may impact you and increase your repayments.
  • Re-fix: Some lenders will allow borrowers to fix the interest rate again once your initial fixed term expires. The new fixed rate is unlikely to be the same as the previous rate but it should give a level of comfort that your household budget won’t be affected by further rate rises.
  • Refinance:If your current lender’s variable rate is higher than expected and you can no longer comfortably afford, you may opt to refinance and switch your mortgage to another lender. Just be mindful that you will need to fulfill the new lender’s eligibility requirements and there may be fees and charges involved in the refinancing process, but you may benefit from the refinance rebates being offered by some banks.
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