OUR LOCATION
Over the past 18 months, Australians have been put under pressure as interest rates reached their highest point in over a decade.
After hitting record lows during the pandemic, rates have risen in quick succession as the RBA attempts to bring inflation under control. The current official RBA cash rate is 4.35 per cent (as of January 2024).
While people with home loans on variable interest rates have been gradually adjusting, anyone who locked in their rates during or immediately prior to the pandemic face a big jump when those terms expire.
Economists were predicting a ‘fixed rate cliff’ and a rush of people selling their homes when their fixed loans expired, but most homeowners have been able to respond in a strategic way so they can continue to make repayments.
If you have a fixed rate loan that is set to come to an end, take a look at some information and steps you can take to manage the change.
What happens when a fixed rate expires?
When a fixed rate term expires on a loan, lenders will usually transition the loan to a variable arrangement that reflects current interest rates.
You could go from 3.65 per cent to something well above 6 per cent, which will mean your monthly repayments will be much higher. This can be a lot to absorb.
Prepare for the change
In the lead-up to your fixed rate loan expiring, do what you can to make extra repayments and ‘practice’ paying more. Look for ways to add flexibility to your budget by reducing household luxuries. Nobody wants to sacrifice their creature comforts but it will be worth it to hold onto your home.
Don’t accept the offer
When your fixed rate loan is approaching its expiration date, it’s important to work with a broker and not just accept the rate your lender switches you to. While you will find yourself dealing with a more expensive home loan, there may be a more competitive rate to be found. Your broker can help you negotiate a better rate or switch to another lender if you can.
Be aware of ‘mortgage prison’
Some borrowers find they can’t switch lenders because of ‘buffer rates’. This is when the bank reviews your income and assets and adds a buffer before approving your loan. They will review your budget and living expenses as well as your income and debts to determine what you can comfortably afford to repay.
You may find another lender with a more competitive rate won’t approve your loan application, even though you have already been paying off a similar amount for a few years.
This can be very frustrating and is another reason why you need the help of a loan expert who can help you prove that you can service a loan when you put in an application.
Fixed or variable?
It is widely anticipated there will be perhaps one or two more rate rises, then rates will remain on hold for most of 2024 before they start to ease again. Right now, many people in the lending space will tell you not to enter another fixed rate agreement, even though choosing a variable loan may leave you open to the pinch of further rate increases over the next twelve months.
There are many different options for home loans and it all depends on your circumstances so it’s important to get personal advice from an expert before you commit to a new loan.
Need help to manage your home loan in 2024? Contact Crest Lending today.
