The millions of Aussies locked into ultra-low fixed rates haven’t yet felt the burn of the recent Reserve Bank of Australia (RBA) interest rate hikes - but that doesn’t mean they’re immune.
New analysis from RateCity.com.au found that many mortgage holders could see their rates more than double when their fixed terms end.
The analysis found around 38 per cent of home loans were currently fixed, with the peak of people coming off their fixed rates around mid-to-late 2023.
Also read: RBA warning: Inflation and rates to surge
And people coming off fixed rates could see repayment rises of up to 45 per cent.
Australian Bureau of Statistics data shows fixing peaked in popularity in July last year, when 46 per cent of new loans were fixed.
If someone with a $500,000 loan, fixed in July 2021 on the average Big Four bank 2-year rate of 1.94 per cent, they would currently be paying $2,105 in monthly repayments.
When their fixed rate ends in July 2023, they would be looking at an average revert rate of 5.68 per cent. Their monthly repayments would rise to $3,042 – an increase of $937 per month.
Even if they managed to renegotiate their loan to the Big Four banks’ average lowest variable rate, they would still be paying 4.42 per cent – more than double what they are currently on, with an increase in monthly repayments of $600.
“Every time the RBA hikes the cash rate, people on a fixed rate won’t pay an extra cent – for now,” RateCity research director Sally Tindall said.
“However, borrowers’ fixed-rate immunity will only last for so long. When the merry-go-round stops, it’s going to be a shock for many because their new rate will be significantly higher.”
Tindall said even if a customer moves onto their banks’ lowest variable loan, their rate could more than double.
“If you’re on a fixed rate, enjoy the reprieve but don’t become complacent,” she said.
“You can still take steps now to cushion the blow when D-day comes.”
What to do when fixed rates expire
Make extra repayments
Tindall said while fixed rates typically came with caps on extra repayments, it could be worthwhile finding out what they were and tipping some extra into your home loan while you were paying less interest.
“The lower your loan size when you come off your fixed rate, the less of a shock the hikes will be,” she said.
Renegotiate or switch banks
At the end of the fixed-rate period, the loan switches over to the bank’s ‘revert’ rate, which is often a relatively high variable rate.
At this point borrowers can refix or try to renegotiate a lower variable rate.
Borrowers can also move to a different lender, without having to pay break fees, provided they pass their new bank’s serviceability tests.
“Your bank should contact you before the fixed period comes to an end to explain your options, but know you’re only being presented with one set of possibilities,” Tindall said.
“There’s an entire market out there ready to compete for your business. It’s worth taking a look at the alternatives.”
“If you’re on a fixed rate, set a reminder two months out to start considering your next steps,” Tindall said.
“The last thing you want to do is roll over to an excessively high variable-revert rate, particularly if you’ve got a large loan.”