Cushioning for the fixed rate cliff

The day you’ve been dreading is looming. You’ve enjoyed a record-low interest rate for a year or more, but now your fixed rate home loan term is ending.

Do you, 1) hide under your bed and hope for the best; 2) trust that your current lender will give you a competitive rate when your loan reverts to variable; or 3) start preparing and do your homework sooner rather than later?

That’s right, folks – number 3 is the correct answer. While none of us particularly like doing homework, now is not the time to be complacent.

And while we’d all like to believe that our current lender has our best interests at heart, the truth is they may not even roll you on to the most competitive variable rate available to new customers.

More than one in five Australians will have their fixed rate loans end and see their interest rate more than double in some instances in 2023. If you’re facing the fixed rate cliff, it’s time to start preparing your financial parachute, so to speak.

How we arrived here

In May 2022, the Reserve Bank of Australia began hiking the cash rate in order to curb inflation. Each month, we saw consecutive rate increases to December, leaving many borrowers feeling the pinch.

At its first meeting in 2023, the RBA put the cash rate up a further 25 basis points, bringing it to an 11-year high of 3.35 per cent. The decision came after Australia’s inflation rate unexpectedly rose 1.9 per cent in the fourth quarter of 2022.

Wind back the clock to 2020 and 2021, and it was a different story. Many borrowers made the most of historically low fixed mortgage rates of between 1.75% and 2.25%.

While these borrowers may have escaped last year’s interest rate increases, now those fixed terms are ending and what’s ahead may be daunting… interest rates of around 5% to 6% and a significant and sudden increase in repayments.

How to prepare for the end of your fixed term

Review your budget

If you don’t already have one, now is the time to create a budget. That way, you’ll be completely across your income and expenses.

You may decide to adjust your lifestyle and budget now so that you are in a better financial position when your fixed term ends.

Work out your repayments

Ask your lender what your rates and repayments will be when your loan reverts to variable. If your budget and current loan allow for it, consider starting to make that repayment now.

This will get you used to budgeting for the higher repayment and help build up a financial buffer for when the fixed term ends.

If you’ve already been making extra repayments or increased your monthly repayment amount, you may already have a cushion to land on as rates increase.

Shop around

It’s a good idea to speak to us two to three months before your fixed rate term expires so we can explain your options.

We may be able to negotiate a better rate with your current lender, particularly if you already own a significant proportion of your property. Alternatively, we may suggest another lender altogether.

Remember that even though interest rates are going up, there’s still a lot of competition amongst lenders for your business.

Reach out if you’re struggling

If you are having difficulty making your repayments or are at risk of defaulting, get in touch with your lender’s hardship team. It’s best to do this early, before the situation gets worse.