What to consider if your fixed home loan rate expires soon

Lenders were eager to reduce home loan rates during the pandemic, often in line with reductions in the RBA cash rate, and fixed rates were reduced significantly, giving borrowers access to loans at historically low interest rates.

Homeowners who fixed part or all of their home loan will be facing sharp increases in repayments when their fixed rate expires.Credit: Bri Hammond

But the tide is now turning, and the huge number of borrowers who made the most of the opportunity to lock in their mortgage rate at the lower rate are sitting on the precipice of having the reduced rates expire.

Loans on the rise

Homeowners who fixed part or all of their home loan during 2020 or 2021 are in for a sharp increase in their repayments when their fixed rate expires.

Borrowers who locked in a fixed home loan rate of $500,000 for three years in July 2020 – when the average rate for that term was 2.63 per cent per annum – have been putting around $2,276 towards their mortgage each month, according to figures from Mozo/REIA.

If they roll over to a new rate of 5 per cent, the jump in repayments could be as much as $647 extra per month. This would equate to an extra $7,764 in interest paid over a year.

But if the rate is as high as 7 per cent per annum, borrowers will have to fork out an extra $1,258 in monthly repayments, which could be up to an eye-watering $15,096 extra in repayments in a single year, Mozo points out.

Change is in the air

As Bendigo Bank area manager Jordan Lovell explains, banks were provided with low cost and long term funding instruments that made it possible for low fixed home loan rates to be made available to bank customers as part of the Reserve Bank of Australia’s response to the Covid pandemic.

“As these funding instruments have expired and the RBA cash rate increased, the cost of longer-term funding sources has risen and the rates available to borrowers whose fixed rate contracts are about to expire is now substantially higher than they are currently paying,” he explains.

The value of owner-occupier refinancing between lenders rose 9.1 per cent to a new high of $13.4 billion in November.Credit: iStock

Now, many homeowners are shopping around in search of a better deal.

According to data from the Australian Bureau of Statistics, the value of owner-occupier refinancing between lenders rose 9.1 per cent to a new high of $13.4 billion in November. Meanwhile, total new home loan commitments for housing fell 3.7 per cent.

“More borrowers switched lenders for lower interest rates as the RBA’s cash rate target continued to rise,” acting ABS head of finance and wealth, Dane Mead says. As is the case for many of the world’s economies, the RBA pointed to increased inflation as the reason for a succession of rate rises.

This month’s value of home loan commitments continued to decline from record high levels seen earlier last year, while new owner-occupier loan commitments fell 3.8 per cent in November, while new investor home loan commitments fell 3.6 per cent.

“The number of owner-occupier dwelling commitments also continued to fall in November to below pre-pandemic levels for the first time,” Mead says.

While homeowners are grappling with the rising cost of living, the Reserve Bank of Australia has suggested it believes some borrowers have been stashing away additional savings in their off-set accounts outside their mortgage in the last few years, which could lessen the pain for some.

Taking charge

The fact is that the reversion rate can be significantly higher than your initial home loan rate, so don’t automatically roll over to a standard variable rate.

Instead, shop around and compare rates among lenders. Competition is always intense, and there are ways to save. The cheapest rates are reserved for new customers, so avoid paying what is effectively a ‘loyalty tax’ by shopping around.

The key is to speak to your lender before your fixed term expires to negotiate a better deal or switch to a new lender altogether to avoid rolling onto what could be a significantly higher rate. Ouch.

For homeowners fretting and burying their head in the sand on how the increase will impact them, the situation is unavoidable, he says.

“Homeowners with fixed rates expiring will experience a considerable increase in their interest rate and subsequently in their repayment.”

“Engage with your current lender to understand your options and what this will mean for you. This change will likely have an impact on your household budget and the earlier this can be planned for and adjusted to, the less likelihood you’ll have of experiencing an unpleasant shock when the minimum repayment increases. This will also allow time to consider the right finance product for your current needs,” Lovell explains.

Above all else, plan and engage early, he says.

”By considering the impact to your household finances and having conversations with your lender early, you give yourself the best chance to ensure you have the right product and deal, and the most comfort possible with how these changes will impact you.”

The situation increases the importance of having the right home loan product to meet your evolving needs, he says.

“Features like 100% offset accounts and ensuring that their current lender is providing a competitive offer become increasingly important in these circumstances,” Lovell says.

An offset account is a transaction or everyday account that is linked to your home loan. The balance of this account offsets the balance of your loan, which reduces the amount of interest you’ll pay overtime. When used effectively, an offset account can help you pay off your loan faster. Subsequently, borrowers who have been utilising an offset account may already be ahead on their payments.

With interest rates on the rise, there’s never been a better time to review your home loan. A Bendigo Bank home loan health check is a great way to ensure your home loan is still the right one for you and is meeting your current needs.