Home loan cliff diving can be dangerous to your financial health

Home loan interest rates are surging for those who haven’t fixed their mortgage, and danger looms for millions who have.

Cliff diving is a sport undertaken by crazy-brave people inspired by slogans such as “life begins at the end of your comfort zone”.

Comfort zones are in short supply in many Australian households at the moment as home loan interest rates rise sharply for the first time in 12 years – potentially adding hundreds of dollars a month to the cost of their mortgages.

And a cliff is looming for millions of homeowners who previously fixed their mortgage rate.

Ratecity.com.au says almost 40 per cent of big bank mortgage customers have fixed-rate loans, and many will come off these rates in 2023.

So while the fixed fraternity is not feeling direct mortgage pain now, they could find their interest rate jumps from just below 2 per cent to almost 5.7 per cent in about 12 months, RateCity forecasts.

That’s an increase of $937 a month on an average $500,000 home loan.

This fixed-rate mortgage cliff has an extra sting on impact, because rising Reserve Bank interest rates – already up from 0.1 to 0.85 per cent since May – are pushing down property prices in many cities as housing becomes less affordable.

Which means some borrowers may lose the ability to refinance to a better deal if their home value drops too far.

However, there are some strategies that can help people on a fixed mortgage to prepare for the cliff ahead.

START PAYING HIGHER RATES

Get used to paying more now, while variable rates rise, rather than be smashed in the face with the sum of multiple rises in late 2023.

Cliff diving on mortgages can be dangerous, so prepare early. Picture: Romina Amato

Fixed-rate mortgages often come with repayment caps, so consider pumping money into a separate account to become more comfortable with higher rates.

Then, when the fixed rate reverts to a higher variable rate, you’ll be able to inject those extra savings straight into your mortgage.

If you have a split home loan where half the mortgage is fixed and the other half is on variable rates, simply pay down the variable component in the meantime.

Yes, it’s difficult to come up with extra mortgage repayments as the cost of living skyrockets, but remember a majority of households are already fighting that battle.

TALK TO YOUR LENDER EARLY

Don’t wait until a few weeks before your fixed rate expires to begin a plan of action.

RateCity suggests setting a reminder two months out from your fixed term ending.

Today’s variable rate pain may be relatively short-lived.

They can only climb so far before our economy screeches to a halt, the RBA cuts and they start dropping again.

And in this regard, the Commonwealth Bank recently forecast rate cuts to begin in the second half of 2023.

REFINANCE TO A CHEAPER DEAL

Rising rates shouldn’t stop people from shopping around for a better deal.

Banks and other lenders are still battling for new business, and if your home loan is in good shape as the end of the fixed term approaches it’s wise to contact your lender and others to see what they can offer.

New customers can still get honeymoon rates, which are more important than ever for those wanting to dive gracefully off the cliff rather than plunge into financial troubles, arms waving wildly.