Cost of living: Homeowners in for mortgage shock with fixed rate term ends

Cash-strapped homeowners are facing a “ticking time bomb” after another rate rise. Here’s what to do before your fixed term ends.

Homeowners who fixed their loans while interest rates were rock bottom could be holding a “ticking time bomb” if they fail to prepare for when their fixed term ends, experts have warned.

The warning comes as the Reserve Bank on Tuesday afternoon hiked the cash rate by half a percentage point to 2.35 per cent.

The increase will add a further $144 to the monthly interest bill on a $500,000 mortgage once passed on to borrowers, further stretching already cash-strapped homeowners.

Interest rates have shot up since May at the fastest rate in nearly 30 years and it has created a growing fixed rate cliff for those who took out dirt cheap loans during the last two years, when interest rates were at a record low.

Interest rates have shot up since May at the fastest rate in nearly 30 years. Picture: NCA NewsWire / Christian Gilles

These mortgage holders faced the prospect of up to $890 in extra monthly repayments once their fixed terms end next year, according to Canstar analysis of national mortgage data.

The analysis assumed the homeowners borrowed an amount close to the average Australian loan size and had their rates fixed below 2.5 per cent – considered competitive in 2020 and 2021.

Financial commentator Effie Zahos says homeowners need to start preparing now. Picture: Tim Hunter.

Canstar money expert Effie Zahos said the repayments increases would be a “rude shock” for homeowners and they needed to start preparing now.

“You can’t afford to do nothing,” she said.

“The worst thing you can do while you’re rolling off a fixed rate term is just accepting the status quo. Ask yourself ‘how competitive is my rate going to be?’

“It’s worth having a conversation with a mortgage broker or a lender. You may need to refinance. The banks all have cheaper basic loan products. And some loan products with a four-year fixed rate could even be an option.”

Finder home loans expert Sarah Megginson said homeowners could prepare for higher rates by doing some basic calculations. She suggested using one of the numerous repayment calculators online.

Jess Greene has fixed her home loan rate. Picture: Jonathan Ng

“For those who are on a fixed rate, it’s a good idea to check now by putting in an interest rate around 6 per cent, to see how high your repayments are likely to jump if rates do get that high,” Ms Megginson said.

“This info allows you to prepare for future rate hikes by adjusting your budget now. Shopping around for better deals on some of your regular expenses is a good place to start.”

Mortgage Choice broker Leanne Johnstone said another way homeowners could prepare was by pumping more money into their mortgage.

“Not all lenders allow this on a fixed rate, it will depend on the product,” she said, adding that homeowners could also put the extra payments into a high interest saving account for when their fixed term ends.

“Now is the time to start looking at your expenses and what you can cut. Can you do more online shopping to avoid impulse buying in the store? It’s these little things that make a difference,” Ms Johnstone said.

First homebuyer Jess Greene, 26, fixed her rate when she purchased a Sydney home earlier this year and said she was scared by the prospect of much higher rates in three years’ time.

“Going fixed felt like a bad idea at the time, but now it looks like it was the right choice,” she said. “But it does mean I could be paying double in a few years. It’s something I’ll have to consider and look at what I can do.

“I do have a bit of trepidation about it. I just hope it doesn’t get that bad.”

Mr Megginson said homeowners should bear in mind the cost of inaction: “Start looking at your options now. Your home loan could be a ticking time bomb if you’re aren’t prepared.”

Originally published as Cost of living: Homeowners in for mortgage shock with fixed rate term ends