What to do when your fixed rate home loan term is ending
Many Australians were fortunate to lock in record low interest rates but this may be drawing to an end.
A large portion of mortgages will be approaching the end of their fixed term, leaving many households paying two to three times their current fixed rate.
In this article, we’ll explain what to expect when your fixed interest rate ends and how to prepare for it.
What happens when your fixed rate home loan ends?
When your fixed term is nearing its end, you’ll need to decide whether to re-fix your loan at a new rate, change to a variable rate or consider switching to a new mortgage provider.
If you don’t do anything before the fixed term lapses, on expiry your mortgage provider generally switches your loan to its standard variable rate, which can be much higher than some of the discounted options available to new customers.
The best thing to do is contact your provider and ask them about your options, including what rates they can offer you.
How to prepare
Consider reviewing your mortgage at least 3 months before the fixed rate expires, as this will give you time to implement changes if required.
Here are some steps to go about this:
- Negotiate with your current mortgage provider
It’s worth speaking to your current provider in advance to find out what variable rate you’ll be paying. This gives you an opportunity to check out other rates available in the market and think about whether switching providers is a better solution.
You can also see if you can negotiate a better rate as this may save you a lot of effort in moving to a new provider.
- Research what other mortgage providers are offering
Now is a good time to see how your loan stacks up against other loans out there. This will help you determine if you’re getting a competitive interest rate.
If you do find a better offer, switching providers can be a smart move but it’s important to look at the costs involved in switching, borrowing costs and switching fees, as these can often outweigh the benefits.
Before you make any decisions, crunch the numbers with an online mortgage switching calculator.
- Consider re-fixing your loan
If you like the predictability that comes with a fixed rate loan, you can re-fix your mortgage with an up to date interest rate.
However, you will be locked into the new fixed interest rate for a period of your loan term, unless you choose to end the contract earlier which may result in break costs.
Be sure to also carefully check out the features of a fixed loan too, such as fee-free extra repayments, redraw and linked offset accounts. Many fixed rate loans do not provide these features.
- Consider a split loan
If you’re struggling to decide between a variable or fixed rate, or if you’re keen on a combination of flexibility plus certainty, you can choose to have part of your mortgage fixed and part of it variable.
For example, you could have 60% of your loan on a fixed rate and 40% on a variable rate.
This approach can provide the best of both worlds. The variable rate component gives you flexibility, while the fixed portion shelters part of your loan from rising interest rates.
- Get help from an expert
If you can’t decide which option is best for you, a mortgage expert may be able to steer you in the right direction.
Mortgage experts can look at your finances and recommend some of the best home loan options to suit your specific needs. They’ll also be able to guide you through switching to another provider if that’s the path you choose to take.
Get a home loan health check
A home loan health check could help you to:
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- find ways to fine tune your loan
- get more certainty or flexibility on interest rate options
- reduce your repayments
- pay off your loan sooner.
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- Make extra repayments before your fixed rate ends
If it’s possible for you to do so, consider paying off as much of your mortgage as possible before you’re hit with a higher interest rate.
By reducing your mortgage balance before your interest rate increases, you could save a lot of money on interest payments before it moves to the new rate.
How to manage higher repayments
When your fixed mortgage rate finishes and your repayments start increasing, your finances may need to be reviewed to cope with the new reality of rising interest rates.
There are ways to help you save and potentially earn more money, which may compensate for the rate increase.
- Review your budget
While it may not be an option for everyone, there are expenses you can cut back on such as:
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- taking public transport to work to reduce petrol costs and parking
- online shopping habits
- expensive memberships that you don’t regularly use
- taking advantage of government and council rebates to reduce your energy bill
- switching to energy efficient appliances and lightbulbs
- reviewing your utility and insurance providers – there may be better deals on offer which could save you hundreds of dollars.
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- Increase your income
Looking for ways to increase your income can help you manage higher repayments once your fixed rate expires.
Consider asking your manager for a salary raise or look for a higher paying job.
You could also consider starting a side hustle like dog walking or online tutoring to make extra cash. Another option is to rent out a room or parking space.
- Consider opening an offset account
An offset account is like a transactional savings account linked to your mortgage balance. The funds in this account can reduce the amount of interest you pay on your mortgage, so holding your savings here can be beneficial.
For example, if you have a $600,000 mortgage balance and $100,000 in your offset account, you’ll only be charged interest on $500,000.
Source: IOOF
