If you locked in a fixed-rate loan before interest rates began to rise, you may be worried about the upcoming increase in your mortgage when the term you locked in comes to an end. Here are a few tips on how you can avoid a budget shock when your mortgage reverts to a variable rate.
When the interest rates first began to rise from their record-low rates, many homeowners rushed to lock in a fixed-term rate to secure a lower, stable rate.
The Reserve Bank of Australia estimates that close to 1 in 4 mortgages were ‘fixed’ at the end of last year, which essentially means the rate was locked in for a period. Usually, banks will offer a fixed-rate period of 1, 2, 3 or 5 years.
However, for homeowners who had locked in a fixed rate earlier, such as in 2020 or 2021 when rates were much lower, will likely feel the pinch a lot more when their fixed-term ends than those who opted for a fixed rate in 2022 or 2023. This is because the rates jumped up from around the 2 per cent mark to closer to the 6 per cent mark, and this could potentially add hundreds or thousands of dollars to their repayments in interest, depending on the size of the loan.
It's difficult to know what the market is going to look like in the future when opting for a fixed-rate, which is usually done from the perspective of knowing exactly what your repayments will look like for a certain term. Unfortunately, all those fixed terms will eventually expire, and homeowners will return to a variable rate, usually paying more interest. Some may fix their loan again when it comes to this time, but it will likely be at a higher rate than the one they were offered in their previous fixed-mortgage term.
If you’re finding yourself in this position, here are a few ways you can make the transition a smoother, and hopefully a less stressful experience.
Build a buffer
A good idea to test how you will be able to manage the higher repayments is to start putting a bit extra into savings between now and the end of your fixed rate mortgage term. A starting point for this could be to use a mortgage calculator to identify a ballpark of what your new repayments will be when the fixed term ends, and put the difference into a savings account. This will give you an idea of how the household budget will be affected, plus you may even benefit from extra interest in the savings account too.
Some fixed-term loans also allow you to make extra repayments, which could help ease the burden when the mortgage increase occurs. At Horizon, we allow up to $30,000 in extra repayments each loan anniversary year, which helps reduce the term of the loan. Horizon also allows you to redraw on those funds free of charge if you require them.
Adjust the budget
If you work out the new higher repayment and it’s looking tight budget-wise, you may need to look at making some cutbacks. Firstly, look at scaling back discretionary spending where it’s feasible, such as limiting dining out or getting takeaway meals and subscriptions or entertainment activities that are not necessary.
Reviewing your budget is always a good idea to ensure you are using or saving your money effectively for your household.
Many online tools can help with budgeting and identifying leaks, such as MoneySmart’s budget tool.
Horizon Bank also has some budgeting tools and tips to help out.
Come up with a plan of action
It’s important to have an action plan before the fixed-rate term ends so you’re prepared for the change in repayments. A good start is to discuss with your lender everything you need to know before the rate changes; for example what rate you will be offered if you were to fix the mortgage again, or what rate you will be offered if you were to stay on a variable once it reverts. Sometimes there’s a difference between what a new customer and an existing customer would be offered ratewise. If you’ve been with your bank for a while and have always made repayments on time, you may find your bank is willing to negotiate to keep your business. If you’ve paid off more than 30% of the value of your property, you may find you’re eligible for a rate discount.
If you want to go into another fixed term loan, it’s also wise to think about that in advance so you can do the sums and get things started promptly. However, if you decide that you want to refinance to another lender, don’t forget to weigh the costs against the savings. Some lenders will charge exit and application fees, so it’s worth doing your calculations to see if refinancing makes sense for you and your situation.
Finally, if you’re having trouble paying your loan and this is causing you anxiety, you can always speak to your lender’s hardship team or a financial counsellor for free via the National Debt Helpline: 1800 007 007.
The end of a fixed-rate mortgage term can be a challenging transition, especially in an environment of rising interest rates. However, you can navigate this phase with minimal financial discomfort with careful planning and strategic decision-making. Building a financial buffer, adjusting your budget, and outlining a clear plan of action are all effective ways to prepare for the increase in repayments.
Remember, open communication with your lender is key. Understand the new rate you'll be offered, negotiate if possible, and consider all your options, including another fixed term or refinancing, always weighing the costs against potential savings.
With the right approach and resources, you can manage this transition smoothly and maintain control over your financial future. For more information on home loans and navigating changes in mortgage rates, visit Horizon Bank today.
We’ve got the Illawarra and South Coast covered with branches located in Thirroul, Wollongong, Albion Park, Berry, Nowra, Ulladulla, Moruya, Bega, Bermagui and Merimbula.
